Spend my Cents or be “Cents-able” and Pay off Debt with My Tax Refund?Feb 26, 2015
According to Google, searches for ‘pay off debt’ increased by nine per cent in January over last year and in a recent surprise move, the Bank of Canada reduced the prime lending rate. Now we find ourselves at tax time again and 70 per cent of Canadians believe they will be receiving a refund. With Canadians carrying an average debt load of over $20,000, and interest rates so low, some may be thinking to themselves ‘what should I do with my tax refund; spend my windfall or pay off debt?’
Today, Canadians have almost $1.8 trillion of debt. A rise from $1.5 trillion of debt last year. Plus, for the fifth straight year, Canadians said they are making paying down debt a priority in 2015. The average tax refund was $1619 in 2014, making it a great amount to put towards bills or pay down debt.
What we do know is that funding retirement has taken a backseat to paying debt for those aged 45-64. Saving for retirement is equally as important as paying down debt. However, boomers should take advantage of low interest rates, and consolidate debt in order to clear the path to a saving and/or RRSP strategy. Consolidating debt allows for more money being applied to the principal, and once debt free, aging boomers will be able to pay attention to financing their retirement.
There are many options available when it comes to consolidation and choosing the one that is right for your particular circumstances may not be as easy as it sounds. Some financial advisors might recommend taking advantage of adding to your RRSP in order to receive an even larger tax refund. The refund can then be applied to paying down debt. That strategy could work, however there are no guarantees interest rates will still be as low when you receive your refund.
Debt relief professionals have a different perspective on consolidating debt. Strategies can range from doing it on your own by contacting creditors and asking for a reduction in interest rates to taking out a home equity line of credit to entering into a debt management program to a consumer proposal and as a last resort, bankruptcy.
Each debt relief alternative has its pros and cons:
Debt relief option
|Doing it on your own||– Creditors may agree to a reduced interest rate– Develop a budget which includes a repayment schedule||– Creditors may not want to reduce interest rate– Credit card debt only– May be tempted to use credit cards again|
|Consolidation loan or home equity line of credit||– Replaces multiple payments with one monthly payment– Reduced interest rate– May extend term and reduce monthly payment||– Must meet the equity requirements to secure loan or line of credit– May require a co-signer– Must have a source of income to enable you to make the payments|
|Debt management program||– Credit card debt only– Interest rates may be reduced||– Creditors have no obligation to participate– Administration or set- up fee plus monthly fees are charged– Government does not regulate industry|
|Consumer proposal||– Debt between $1,000 – $250,000– One monthly payment– Freezes interest accumulate interest on the day you file– Included: credit cards, lines of credit (unsecured), personal loans, payday loans, income taxes– Stops creditors from taking any legal action– Protects your assets (car, home, RRSPs, RESPs)
– Extends the time for repayment
– No fees other than monthly payment
– Avoid bankruptcy
– Only a licensed professional can provide this service
|– Unsecured credit only– Not included: car loans secured by the car; mortgages secured by the house– Must be accepted by all creditors– Affects your credit rating – listed as R7|
|Personal bankruptcy||– Immediate relief from financial stress– Protection from creditors taking legal action against you– Protects certain assets– Release of most, if not all debts– Stop wage garnishments– Counselling to assist with money management going forward
– Relief from financial stress
|Debts not released:– Secured debt that uses property or assets as collateral (car or mortgage) which you choose to keep– Student loan if filed less than seven years post graduation– Court imposed fines– Alimony or child support– Credit score listed at R9|
Read more about dealing with Retirement and Debt.
Yes, your tax refund may be a financial ‘windfall’ but before you spend it all, evaluate your financial situation and if necessary, make strengthening finances the priority. Say no now, so you can say yes to a comfortable retirement and debt-free living in the future.
Will you be using your refund this year to pay off debt? Share your story with us on Twitter at #RefundYourDebt.