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Debt is all a Matter of Perspective

30 August 2012

When TransUnion came out last week and announced that our debt levels are the highest they’ve been since 2004 (and possibly even before,) the country was sent into a panic. Financial experts from every corner of the nation weighed in on the subject, and the blogosphere was littered with headlines spelling doom and gloom. We are clearly headed for a recession, and things are about to get real bad for Canadians.

But is that true? Even though our average non-mortgage debt per person is just over $26,000; and it can’t be ignored that this was the dangerous level the U.S. slipped into before their big fall, should we allow panic to set in?

Probably not, if you look at the stats a little more closely. A year ago when our debt crisis seemed to be coming to a head that we wouldn’t be able to ward off, lines of credit, mortgages, and home equity loans made up a good deal of that debt. Hence, Finance Minister Jim Carney stepped in and tightened the rules; shortly before OSFI did the same thing. Those measures now seem to be working and even though our debt may be high, the TransUnion report also showed that it’s mostly car debt that’s been driving up that debt. And that might not be such a bad thing either.

Canadians seem to have a habit of keeping their cars for as long as they can. According to The Globe and Mail, as of 2011 the average age of vehicles on the road was 8.6 years old. Now almost two years later, it’s probably a good time to get a new car for a lot of people. Not to mention that deals can be found just about anywhere, and the rates on borrowing – even for a new car – are super low.

Laurie Campbell, CEO of Credit Canada Debt Solutions, agrees. “It makes a lot of sense for people in good financial shape,” she says. “But I’m jaded. I see people coming in here and half their income is going to car payments, gas, insurance, parking, repairs – it’s insane.”

And that’s certainly when the trouble starts – when people have car loans and expenses that they just can’t afford. But many people who are taking out those car loans can probably also afford them as well. Especially when you take into consideration that our other debt is down.

According to chief economist Benjamin Tal at CIBC, mortgage borrowing has increased by 7 per cent. While that may not seem like a great number, it’s the slowest growth the mortgage market has seen since 2009. And as the new rules continue to force more people out of the market, that’s a number that’s likely to see a decrease as well.

And a reason for that growth might simply be that people are using these products, lower-interest products, rather than costly borrowing vehicles such as credit cards.

“People are getting smarter – they’re moving from high interest rates to low interest,” says Mr. Tal. “They’re optimizing their debt.”

So is our debt really that bad? Well it’s not great, that’s for sure. But do we need to panic?

Why don’t you tell us! Leave a comment below on what you think of our debt situation or, Like our page on Facebook and get in on the conversation!

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