Tuesday, December 14, 2010

Canadians' Household Debt is "higher than it’s ever been"

Hey Everyone!

If you haven't seen it on the news yet, then this will probably surprise you. 

A Globe and Mail article published yesterday highlights an alarming trend in Canadian loans.

"Canadians’ borrowing has entered ``uncharted territory’’ and the risks associated with the level of debt households are carrying is something that ``we all have to take seriously,’’ Bank of Canada Governor Mark Carney said Tuesday."

To put this into perspective, our debt-to-income ratio is now higher than Americans' for the first time in a dozen years. Wait, what's debt-to-income ratio?

It's simply a ratio of how much debt you are currently carrying, compared against your current income. According to the article, this ratio has reached a whopping 148.1 per cent. Again, this means that for every dollar that we make, we're borrowing 1.48 times as much!

But why's that so crazy? Why should we worry about that?

The government is getting worried because, if there were a sudden negative shock to our economy, such as a drop in house prices, higher borrowing costs or job losses, it would leave people unable to make their payments and hence cause personal and corporate bankruptcies.

While we as young people are not the main people behind this, we can take one lesson away from this issue.
Loans aren't all bad; sometimes, we do have to borrow money to finance our college fees or to buy a car. It's practically impossible to pay it all at one go with cash! So loans do have their merits too.

But the minute we start using loans as our first 'strategy' in life, then we'll be getting into some trouble. We should never get a loan to finance our vacations, or frivolous wants that we don't really need urgently. It can all get out of control really easily if we're not careful.

So think twice before you get a loan! Loans are always the last option, if we can help it. Who wants to waste money on interest anyway? 

Brought to you by
The cashsmart Team!

1 comment:

  1. Have to consider the interest rate!!