30 May, 2023
debt consolidation
In The News,Personal Finance Comments Off on Addressing The Challenge of Debt Loans Among Canadians

debt consolidation

The latest data suggests that Canadians are facing increasing challenges with their debt load as bankruptcy filings hit a 32-month high in November. The Office of the Superintendent of Bankruptcy reported 9,784 bankruptcy filings, marking a 17.5% increase compared to the previous year. These numbers, not seen since the start of the pandemic, indicate that the strain of soaring inflation and rising interest rates is starting to manifest in household finances.

Factors such as the increased cost of living, expenses surpassing income, and higher borrowing costs have contributed to the growing debt burden among Canadians. A recent poll conducted by CIBC’s annual financial priorities revealed that a quarter of Canadians took on more debt in 2022. With rising inflation and interest rates, households are finding it increasingly challenging to manage their debt obligations.

 As the economy slows and unemployment rises, more households are likely to face bankruptcy.

The concern is whether the strength of the labour market, characterized by a historically low jobless rate, and the savings accumulated during the pandemic will provide relief. However, with the Bank of Canada expected to raise its key rate to 4.5% this month, the debt service ratio is projected to reach a record high of 16% by the second half of the year. This surpasses the pre-pandemic peak of 15%. As interest rates remain elevated throughout 2023, a significant portion of Canadians’ pandemic savings will be allocated to servicing higher debt costs.

The impact of these rising debt levels and financial pressures is evident in the results of the MNP Consumer Debt Index. The index fell to a five-year low of 77, reflecting Canadians’ growing concerns about their personal finances. The survey revealed that nearly half of the respondents (47%) expressed worry about their debt, a record-high figure that increased by seven points from the previous survey. Moreover, fewer people were confident in their ability to cover living expenses without accumulating more debt (51%). The survey also indicated that 26% of respondents felt their ability to absorb a one percentage point interest rate increase had worsened. Three in five people expressed heightened concerns about their debt repayment abilities, and 59% stated that they would face financial trouble if interest rates continue to rise.

Tips for Managing and Reducing Debt Loans

To cope with the rising debt load and manage financial challenges, Canadians can consider implementing several strategies:

Create a budget

Develop a comprehensive budget. Track income and expenses to gain a clear understanding of where money is being spent and identify areas where expenses can be reduced. 

Prioritize debt repayment

Allocate extra funds toward paying off high-interest debts and consider consolidating debts to simplify payments.

Make a list of your debts, including interest rates and minimum payments. Consider using the debt avalanche or debt snowball method to prioritize and pay off debts strategically. Always make at least the minimum payments to avoid penalties.

Seek professional advice 

If you’re struggling to manage your debt on your own, consider reaching out to a credit counselling agency or a financial advisor. They can provide guidance on debt management strategies, budgeting, improving financial literacy, negotiating with creditors, and helping develop a personalized debt repayment plan.

Negotiate with Creditors

If you’re struggling to meet your debt obligations, don’t hesitate to contact your creditors. Explain your situation and explore options for lower interest rates, extended repayment terms, or hardship programs.

Consolidate Debt

Consolidating high-interest debts into a single, lower-interest loan can make repayment more manageable. This option allows you to streamline your payments and potentially reduce interest costs.

Cut back on non-essential expenses

Reduce discretionary spending to free up funds that can be used to pay down debt or build an emergency savings fund.

Explore debt relief options

Investigate debt consolidation, negotiation, or debt settlement programs that may help lower interest rates or reduce the overall debt burden.

Increase income sources and reduce expenses

Consider ways to increase your income, such as part-time work, freelance opportunities, or alternative income streams to supplement current earnings and accelerate debt repayment.

Simultaneously, look for areas where you can reduce expenses, such as cutting unnecessary subscriptions or downsizing your living arrangements.

Avoid taking on more debt

While working towards debt repayment, it’s crucial to avoid taking on new debt. Practice responsible borrowing habits, such as avoiding unnecessary credit card purchases and only taking on new debt when absolutely necessary. 

By adopting these strategies, you can take proactive steps toward managing their debt and improving their financial well-being. It is crucial to stay informed about personal finances, seek assistance when needed, and make mindful decisions to ensure long-term financial stability.