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How much debt is too much in Canada?

Posted on 18 May 2023

Written by Colin Boulton

There are many reasons why more and more Canadians are finding themselves with increasing amounts of debt each year. Societal pressure can make us all feel like we need a new car, a bigger home, or a more glamorous vacation destination. Although this is fine if you can afford these items, it becomes problematic when individuals decide they want them now and worry about paying them off later. Coupled with a rising cost of living and interest rates that continue to rise, it is all too easy to find ourselves facing increasing amounts of debt. Even if you can scrape by to make your payments now, the situation could deteriorate. So, when are you in too deep? How much debt is too much in Canada? Although it is dependent on a number of factors linked to your personal finances, in this article, we explore how you can determine when you may be facing too much debt, and what to do in this scenario.

What is the average amount of debt a Canadian has?

Of course, the average amount of debt of a Canadian varies each year. In 2022, the average Canadian owed $20,744 in debt which excludes mortgage debt. This figure continues to increase each year, and was up 1.54% over 2021. Of course, there are nuances in this figure depending on the age group being explored, and 46-55 year olds carried the highest amount of debt last year. The amount of debt will also vary depending on when in Canada you live – expensive cities like Toronto and Vancouver come with higher rents than smaller towns.

Is it bad to have debt in Canada?

Contrary to popular belief, it is not always bad to carry debt in Canada. In fact, it is pretty normal – most Canadians will have a mortgage at some point in their lives, and many take on student loan debt to fund them through their education. Given the high costs associated with vehicles too, many will take out car loan debts in order to finance new cars. Of course, many people carry a balance on credit cards or lines of credit to make everyday purchases. In this sense, not all debt is bad – some is required to help you achieve things in life, provided you can make your repayments on time. While debt is common, it is still avoidable. Debt can quickly spiral out of control if you do not keep on top of your repayments, and it is important to recognize when it is becoming too much.

Which types of debt are there in Canada?

Broadly speaking, there are two primary types of debt in Canada – unsecured debt and secured debt. Secured debt is associated with a particular asset which is used to fall back on should the borrower not make their repayments on time. Examples include mortgages and car loan debt. Because secured debts are generally less risky as they are backed by collateral, it is usually possible for the borrower to gain a lower interest rate on the loan. Unsecured debt, on the other hand, is riskier to the lender because it is not backed by any collateral. For this reason, it usually comes with a higher interest rate. Examples include credit card debt, student loan debt, and lines of credit.

How much debt is too much in Canada?

This is a question commonly asked by Canadians. Given that the average amount of debt carried by Canadians is over $20,000, you may be thinking that this is a lot of money. The answer to this question is very dependent on a number of different variables, all tied to the individual’s unique financial circumstances. It is dependent, for instance, on income in relation to debt. If you have a reasonable amount of debt but a high income, your debt will not be such a concern. There are also two types of debt – good debt vs bad debt. Good debt is any debt that can be considered ‘an investment’ in the future – for instance, gaining an education to secure a higher paying job. Bad debt, on the other hand, is any kind of loan or credit that is used to spend on assets that will not add to your financial future, for instance, handbags and vacations. These definitions should be taken with a grain of salt, but they give you an idea. There are a few ways to assess how much debt is too much in Canada:

Debt to income ratio

The best way to determine ‘how much debt is too much’ is by working out your debt to income ratio. This ratio works out the amount of debt you need to repay each month versus your net income after tax. In Canada, you should aim for a ratio of 35% or less. If you discover you have a debt to income ratio that is 43% or more, you likely have too much debt on your hands. The debt to income ratio is often calculated by banks and financial institutions as part of their decision making process on whether or not to lend to a borrower. The desired percentage can vary from bank to bank and the kind of loan or credit you are after, but ideally a ratio of 42% or less is ideal. You can calculate your debt to income ratio by inputting your monthly income and your monthly debt payments and expenses. Once you have these two figures to hand, you then need to divide your monthly expenses by your pre-tax income. This will give you your debt to income ratio percentage. If, for instance, your monthly debt payments are $500, and your monthly income is $2,000, your debt to income ratio would be 25%.

How can you reduce your debt to income ratio?

Put simply, there are two things you can do to reduce your debt to income ratio:

  • Increase your income
  • Reduce your debt

Tweaking either of these variables will result in a lower debt to income ratio, and more funds to cover less debt. It is possible to reduce your debt via a debt consolidation loan, refinancing, or finding a form of debt relief to permanently reduce or eliminate your debt altogether. We will cover more on these forms of debt relief later.

Credit utilization ratio

Another way that you can monitor the amount of debt you have is by calculating your credit utilization ratio. This is another way that banks and financial institutions can monitor your debt, and it is often used to form your credit score. The lower your credit utilization ratio, the better your credit score. Generally speaking, a good credit utilization score is 10% or less. You can calculate your credit utilization ratio with two inputs – the total amount of credit available to you, and the outstanding amount of debt you have. You then need to divide the amount of debt you have by the total amount of credit you can take out. This will give you a percentage. If, for example, you have a credit card limit of $10,000 and a balance owed of $1,000, and a car loan of $30,000 but $3,000 outstanding, your total available credit would be $40,000, with an outstanding balance of $4,000. This would make your credit utilization ratio 25%.

How can you reduce your credit utilization ratio?

Much like reducing your debt to income ratio, you can lower your credit utilization ratio by either:

  • Increasing the credit available to you
  • Reducing your debt

Of course, lowering your debt is preferential instead of creating more potential credit.

What if I have too much debt in Canada?

If you feel that you have too much debt, and are struggling to make your repayments, there are a number of actions you can take to resolve the situation. Often, Canadians who simply cannot make their payments each month and on time will likely be in need of some kind of debt relief. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, so they are a great starting point when you are facing financial difficulty. Here are the most common forms of debt relief in Canada:

Debt consolidation loan

If your debt is relatively minimal and you have multiple different sources of debt, a debt consolidation loan could be a good option for you. It is the process of taking out a new loan to combine and condense multiple separate loans you may have. As well as simplifying your debt into one monthly payment, often debt consolidation loans have the advantage of reducing or even eliminating the interest rate you need to pay on the loan. If you are have more substantial debt, a debt consolidation loan will likely not be the solution for you.

Consumer proposal

A consumer proposal is a legal form of debt settlement. It is the process of suggesting an affordable monthly repayment figure to your creditors, and can reduce your debt by up to 80%. Your Licensed Insolvency Trustee will then negotiate with your creditors on your behalf to have this accepted. Consumer proposals have a number of advantages, including allowing you to keep your assets, offering protection from creditors, and freezing any interest and penalties. At Spergel, we have a 99% acceptance rate on any consumer proposals we file, which means you have a 99% chance of drastically reducing your unsecured debt.

Bankruptcy

Bankruptcy is the legal process of assigning any non-exempt assets you might have over to your Licensed Insolvency Trustee in exchange for the clearance of your debts. Your assets will be sold with proceeds going towards repaying your creditors. Bankruptcy is the best way to a fresh financial future, and can offer a great deal of peace of mind. Although often a last resort when it comes to debt relief, bankruptcy has a number of advantages. It can relieve you of the mental health problems associated with unmanageable debt, stops legal action including wage garnishments, and offers full protection from your creditors.

Curious about how much debt is too much in Canada? Book a free consultation with one of our experienced Licensed Insolvency Trustees at Spergel. We have over thirty years’ experience of helping Canadians gain debt relief. We will assess your financial circumstances and advise you on the best pathway to debt relief for your unique financial circumstances. Reach out today – you owe it to yourself.

Colin Boulton

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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