The ease in which Canadians can get their hands on borrowed funds is astonishing.
Once we have the money in our wallets the temptation to buy and spend is all around us, especially during the holidays. Look better, feel better and be better – by spending more money. That’s the message we’re continually bombarded with.
My Interesting Phone Call
When I sat down to write this piece, I wanted to talk about the newest Statistics Canada report on Canadian debt levels, which are extraordinarily high.
As I started writing my phone rang and the conversation that ensued blew my mind. I was experiencing first hand how easy it is to get into debt.
The lady on the line introduces herself as Tracey, a Financial Advisor from CIBC.
She is offering me a no questions asked $18,000 line of credit. The first words I heard were “we are offering you this money with no credit or employment check. You can have this money right away.”
What I’m hearing is Tracey (and by extension CIBC) aren’t concerned about my financial situation, they merely want to lend me the money, at the premium rate of prime plus 3 per cent.
I kindly turned her down, after all she is just doing her job and now I have to do mine.
The Buck Stops at You!
When it comes to debt management we’re on our own. If banks could have it their way we would live our lives in debt – FOREVER.
How many homes did Tracey call after me? And how many people took her up on her offer unknowingly dragging themselves into debt they didn’t ask for.
No matter how healthy you are financially, borrowing $18,000 that you don’t need can destroy your economic situation in months. There are always ways your debt can get out of control by making a few bad decision.
A luxury vacation you don’t need, a new car you weren’t planning for or expensive presents to friends and family that you paid for from you newly borrowed funds.
Debt Levels Hit a Record High
We’re in more debt and are worth less then 3 months ago. Statistics Canada reports the average household debt in Canada hit a new record high of almost 153 per cent to disposable income in the third quarter. That’s a leap from 150.7 per cent in the previous quarter.
Household net worth has declined by 2.1 per cent to $180,100 from $184,700. It’s the steepest drop in almost three years as the value of pensions and stock investments declined.
As Canadians are getting poorer they are taking on more debt to bridge the gap between their incoming money and rising expenses. Governor Mark Carney is again asking Canadians to slow down on the borrowing and realize interest rates are not going to stay this low forever. In fact as soon as Carney can raise them he will, it would be the responsible thing to do.
The problem is money has been too cheap for too long and banks and other financial institutions are happy to keep doling out the cash to any addicted consumer who will take it.
It’s sad to know that despite our country’s top banker pleading to the country to stop that nobody, including the banks are listening to him.
Let’s Get Some Perspective
Here are some numbers that put things in perspective.
If I took Tracey up on her offer of the $18,000 line of credit and spent the money in two months, I would be spending $199 per month to service my debt if I planned to pay if off in 10 years. It would cost me $6000 in interest.
If rates climb to more normal levels and prime reaches 6 per cent, my monthly payment would jump to $226 and it would cost me more than $9000 in interest to pay off the loan in a decade.
Canadians debt levels are higher than the Americans and for some reason we have not learned in the last three years how debt can destroy us quickly.
No one cares about your money as much as you. Live within in your means, pay off your debt more aggressively and don’t take on more. Don’t get addicted to the cheap money because it’s a hard drug to wean off. If the phone rings and it’s the bank, don’t accept borrowed money that you didn’t ask for, it clearly means you don’t need it.