globeandmail.com

How to beat the bank

Tuesday, January 10, 2006

Dale Jackson

TORONTO (GlobeinvestorGOLD) — If we’re so rich why are we feeling so poor? A new Pollara Inc. poll shows a record number of Canadians are tuned into the fact that our economy is growing but most aren’t seeing the benefits at home. It’s not such a mystery when you look at the latest household finance trends. More and more of our income is going toward servicing debt.

Recently released data from Statistics Canada show that nearly half of Canadian households spend more than their pretax income – up nearly 40 per cent from the early 1980s. And over the past 20 years, per capita debt has doubled.

A recent survey by CIBC World Markets shows our borrowing is increasing faster than our pay raises, and our debt is growing faster than our assets. It says our debt-to-income ratio rose to 117 per cent from 115 per cent in the second quarter of this year, and our debt-to-asset ratio rose to 19.5 per cent from 19 per cent.

Household debt comes in the form of mortgages and consumer borrowing. Detailed retail sales figures over the holidays have yet to be firmed up, but early indicators show consumers lived it up this Yuletide season. A good barometer is the just-released U.S. Institute of Supply Management’s non-manufacturing Index, which shows a significant increase this holiday shopping season.

That means when the bills start pouring in this month you might as well make two payments: One for the item purchased and one for the interest. The key from a wise consumer’s point of view is to gradually lower the amount owing on interest by increasing payments on the amount owing for the item.

A good way to make that transition occur more quickly is to eliminate the highest debt first. Credit cards issued by retailers like Sears Canada and The Bay are the most notorious – often charging somewhere in the high 20-per-cent range. Standard credit cards from the likes of Visa, Master Card and American Express have borrowing rates somewhere in the high teens.

Borrowing rates on consumer loans at the major banks tend to be in the high teens or lower single digits – depending on your credit history and your relationship with the bank. Consolidation loans are popular this time of year for people who want to borrow money at the lowest rate to pay off debt at the highest rate.

But if you must borrow, the best way to borrow is through a secured line of credit. This can be done by providing an asset you own as collateral for the loan. A lending institution will give you the best rate because the risk of default is low. To put it another way – if you fail to make your payments, the bank can recoup the loan by taking possession of the asset you put forward as collateral.

The most common asset used as collateral for a secured loan is a home. Interest charged on a home equity loan can be as low as prime, which is currently five per cent. The trick is to negotiate the best loan with your bank …and don’t worry too much about putting their feet to the fire. With household debt at a record high, they’re doing just fine.

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