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Consumer Debt in Canada

Debt, as we all know, is money that is usually due after it has been borrowed, including interest. It has to be paid back over a period of time, usually weekly, biweekly or in monthly payments. 

Canadians carry a lot of debt. According to a 2022 report by Equifax Canada, total average Canadian consumer debt was $2.36 trillion in mid-2022. That’s an increase of 8.2% compared to 2021 and a 24% increase when compared to 2020.

Non-mortgage debt per consumer was $21,183, with most being lines of credit and credit card debt. 

Paying Off Debt

There are different types of debt repayments. Fixed payments mean that you pay the same amount each time as in a fixed mortgage rate. Your interest rate is locked in for several years and does not change when the prime interest rate fluctuates. 

Variable rates means that debt payments can change. Individuals with variable mortgage rates found their payments increased seven times in 2022 as the prime rate was raised by the Bank of Canada

Good vs Bad Debt

Is there such a thing as good debt? Any money you owe is debt, whether you classify it as good or bad, but it’s almost impossible to live in today’s world without taking on some financial aid. Before you buy, take the time to consider if the purchase is worth incurring the debt if you already owe money or are using credit because good manageable debt can quickly turn bad if you take on more than you can handle. 

Good debt

Good debt is considered any debt that gives you something that benefits your life overall such as education or equity on a home. For instance, good debt can include things such as: 

Student loans as an investment in education, which can lead to a higher income in the long term. This type of loan used to have a lower interest rate compared to credit cards but as of April 1, 2023, the federal government has permanently removed the accumulated interest on Canada Student Loans. It has become much more affordable to borrow money for a post-secondary education, but it is important to remember that it IS still a debt.  

If you are considering a student loan for post-secondary education, make sure you check for any qualifying bursaries or grants that could offset the amount of money you borrow. 

Mortgages are another common example of good debt. You borrow money to buy a home with the idea that by the time you’ve paid it back, your home’s value has increased. That improves your net worth and gives you equity that you can leverage to either buy a second home, a reverse mortgage or for renovations. That’s if house prices continue to grow. If not, you could end up with a debt that’s bigger than the value of your home.  

Small Business Loans can allow you to grow or to start a profitable company that could increase your future finances. Although not all new businesses thrive, in order to qualify for a business loan you must have a comprehensive business plan. This forces entrepreneurs to consider both their goals and the risks involved.  

Bad debt

Bad debt could be defined as taking money from your future self to spend more in the present. If the debt you’re taking on won’t bring you future income or increase wealth and is just funding your current lifestyle, it’s bad debt

Credit card debt is the classic example of bad debt. It has a very high interest rate ranging between 19.99-25%. If you can’t pay off your credit card entirely every month, interest increases making it harder to pay off. 

Another example is payday loans. These are short-term, unsecured loans, which means you can go to a payday loans business and borrow money without needing to put up an item like your car or home as security, however these loans have an average annual interest rate of 442%, which makes it extremely difficult to repay the original loan plus interest. Often, people pay what they can but the high interest rates means they end up in a debt spiral, owing more than the original principal. 

What about auto loans?

Auto loans have been said to be an example of good debt because owning a car can help you get to work so you can earn money. This becomes more important if you buy a secondhand vehicle and pay off the car financing before you sell the car.  On the other hand, if the interest rate is high and you’re unable to repay the loan, then it is truly bad debt. According to recent debt statistics, people taking on car loans are missing their monthly payments, which negatively affects their credit report and credit score.  

Avoiding bad debt

Always pause before you make a purchasing decision that may cause you to owe money, creating or increasing debt, and think if it will benefit you in the short and long term. Is what you’re going to buy going to be easy to pay off quickly or will it benefit you for years to come?

There will be times in your life, regardless how careful you are, where financial issues can cause you to go into debt.  This happens to many people, and you are not alone. What you thought might be good debt turns bad.

Times like this require the help of those who know debt best. Licensed Insolvency Trustees are highly trained, regulated and licensed debt professionals. Allan Marshall & Associates have helped thousands of people get back on their feet financially and break free from debt. Contact us for a free, no obligation consultation to learn about your options.  

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Scott Marshall BBA, C.I.R.P, L.I.T

Scott is serving as Vice President and managing partner of Allan Marshall & Associates Inc. since obtaining his License as a Trustee (LIT) in 2003. Scott graduated with a Bachelor of Business Administration (BBA) from the University of New Brunswick and is an active member of the New Brunswick business community. In past years, Scott has been a valued member of the Wallace McCain institute.