Debt is a major problem in Canada today. Everyone is sounding alarm, from the central banks to Bay Street, but is anyone heeding their advice? It doesn’t seem like it, according to the data. Here is what we know about the country’s addiction to debt:
- Total household debt is $2.2 trillion.
- Canadians owe $1.78 for every $1 of disposable income.
- Insolvency rates rose 9.2 percent last year.
- Borrowing costs are ballooning as interest rates gradually rise.
- Debt growth is roughly 3.5 percent per year – its peak was 6.3 percent in 2017.
These are not good indicators of a strong economy. A lot of consumers are living paycheque to paycheque, relying on debt to keep their heads above water. As rates go up, it is becoming more expensive to service the billions in debt we currently have.
Before you take on debt, or you want to be to tackle your obligations, it is important to know what the different kinds of debt are and how they impact your personal finances.
Here are seven types of debt that will cripple your finances:
1. Credit Card Debt
We have all been there. We see that nice cashmere sweater, we have a craving for steak and lobster, and we want to buy that coffee maker. We know that we can’t afford it, but we successfully convince ourselves that we should go into debt to enjoy these luxuries.
“You’ve earned it!”
So, what happens? We open our wallets, whip out a piece of plastic, and proceed to swipe, tap, or insert. A year later, you’re still paying off that steak and lobster dinner with interest. Ask yourself, was this type of debt worth it?
2. Mortgage Debt
Considering how expensive the nation’s real estate market is, your mortgage is possibly your biggest expense, which makes sense because it is the largest acquisition you will ever make in your lifetime.
Whether you have a monster mortgage or a mortgage that eats up at least half of your income, mortgage debt can be a stressful one, especially when the variable rate increases thanks to rising borrowing costs or there are additional bills to pay related to the house.
Toronto or Vancouver, Iqaluit or Yellowknife, homeownership is exorbitant no matter where you live in the Great White North.
3. Line of Credit
A line of credit is the latest financial product that is popular for Canadian consumers, particularly the home equity line of credit (HELOC), which entails borrowing against your home. This a great use of your home if it is worth much more than when you paid for it. Many homeowners use the HELOC for their kid’s tuition, lavish vacations, or home remodeling.
The big concern? What happens when the housing bubble bursts?
That’s what happened to folks on the other side of the border. They used their homes as ATMs, and then when the market crashed, they could not afford to repay the HELOC.
It can be a good type of debt or a bad one. It’s all about timing, purpose, and total sum.
4. Student Loan
Today’s college graduates will be saddled with student loan debt for decades. In fact, it is quickly becoming one of Canada’s biggest types of debt, and it is crippling future generations. Because of the billions in student loan debt, many young people are delaying adulthood – not buying a house, not buying a car, not starting a family, and not living the life any 30-something should.
5. Automobile Loan
Auto loan debt is quietly and quickly turning into a debt that is impacting households. Whether you’re borrowing from the bank or you are relying on longer leases that use smaller monthly payments, your auto debt will soon be a burden on your finances.
6. Payday Loans
When the banks turn you down, your credit cards are maxed out, and you need quick cash to cover an emergency, a payday loan can be your only option. But it is important to know what you’re getting into.
Here is what we know about payday loan debt in Canada today:
- Roughly two million Canadians use payday loans every year.
- 70 percent owe more than one payday loan.
- The average payday loan debt is $3,500.
Payday loans can come with egregious interest rates, origination fees, and other costs. In other words, $500 payday loan can turn into $800, plus if you’re late, then it could metastasize into $1,000.
Like car debt, payday loan debt is rising to the top of ubiquitous debt for Canadians.
Lately, it seems like a day doesn’t go by that you don’t have a bill. Renter’s insurance, gas, hydro, water, credit card, telephone, Internet, and the list goes on and on … and on. It never ends.
While you may be able to afford these bills, the sheer number of them may hurt you in the end. What does this mean? Well, if you’re late, then you’re going to be charged a late payment penalty, and that just eats away at your hard-earned income. Or, if it becomes too big, then you’ll soon have an additional type of debt on your hands.
So, use pre-authorized payments, write it down in your phone, or set an alert to be reminded.
Unfortunately, it feels like the only way to survive in today’s world is going into debt. The sofa you own, the food in your refrigerator, or the diploma on your wall – these are all things paid for with debt, and you’re still paying for it after all these years.
It’s tough to be in debt, especially when you know it’s going to be years before you can pay it off. Now that you know the various types of debt, it is your responsibility to avoid them as much as you can. Otherwise, you will never sleep again.