What is considered a large amount of debt?

Posted on 9 November 2023

Written by Colin Boulton

Debt is a common part of life nowadays, and indeed not all debt is actually bad. For many, debt is required as an investment at some part of our lives, be it taking on student loan debt, a mortgage, or credit card debt to facilitate vacations or experiences. While it is important to understand the difference between good debt vs bad debt, it is crucial to understand when the amount of debt you are taking on might be too much. By understanding what might be considered a large debt in Canada, you can make informed financial decisions, and manage your financial wellbeing more effectively. You can recognize the warning signs of having too much debt, and seek support where it might be needed. So, what is considered a large amount of debt?

What is considered a large amount of debt?

The concept of a ‘large amount of debt’ is subjective. It depends on a number of factors for each individual, like income, financial goals, and the types of debt you might have. That said, there are some guidelines to help you identify when the amount of debt that you have might be a cause for concern:

Debt to income ratio

A key metric used to assess the size of an individual’s debt load is the debt to income ratio. It is calculated by dividing your total debt by your gross annual income. In Canada, a debt to income ratio of 40% or more is often thought to be a high debt load. If your debt obligations are more than 40% of your income, it could become difficult for you to meet your financial goals and repay your debts efficiently.

Types of debt

The kind of debt you have can impact the size of your debt. As mortgage debt is usually much larger than other types of debt you might have, it is usually considered manageable provided it is within your budget and you have the income to make your payments. On the other hand, having a lot of high interest consumer debt like credit card debt, payday loans, or personal loans can soon become unmanageable – especially if payments are missed and interest is left to accrue.

Total amount of debt

The total amount of debt that you owe is a distinct indicator of how substantial your debt might be. If, for example, you have a mortgage of $500,000 and have a high income, this might well be very affordable. On the other hand, if you have a lower income, this could soon become overwhelming. High amounts of unsecured debt, including credit card debt, can indicate a large debt burden, even if the individual amount of debt is relatively small.

Credit score

Your credit score is a good indicator of how creditworthy you might be, and it can reflect the health of your debt. If your credit score is fast declining because you are making late payments, or because you have a high credit card balance, it might suggest that your debt is becoming too much.

Average debt by age

You might want to see how your debt compares to others your age. If yours looks like considerably more than the average, you may want to review why this is, and if the debt is becoming a problem. Not all debt is bad. Good debt, in fact, might be considered to be any kind of investment for the future – for example, a mortgage so that you can buy your own property, or a student loan debt to enable you to gain a career in a chosen profession.

How to manage a large debt load

If you find yourself with what you consider to be a large amount of debt, you should act in order to begin managing your finances efficiently. At Spergel, we recommend taking the following steps:

  • Creating a budget – you should produce a detail budget that tracks all of your income and expenses. This will help you to understand the ins and outs of your financial circumstances, and to identify areas where you can pull back your spending.
  • Debt consolidation – investigate whether taking on a new loan to combine multiple separate loans and offer a lower interest rate would be beneficial for you. In some cases, it can help to reduce monthly payments and simplify your debt. Examples of debt consolidation loans include home equity lines of credit and personal loans.
  • Prioritize high interest debt. A smart move is to focus on paying off your high interest debts first to minimize interest charges and to speed up the debt repayment process. This is known as the debt avalanche method.
  • Build an emergency fund. It is a good idea to create an emergency savings fund to cover any unexpected bills or expenses, and to avoid getting into debt in the future by having a buffer amount to rely on.
  • Consider your debt relief options. If your debt is becoming unmanageable, you should consider your available debt relief options. Solutions including debt settlement, consumer proposals, and bankruptcy can substantially reduce or even eliminate your unsecured debts entirely.
  • Speak to a professional. If you think you need debt relief support, speak to a Licensed Insolvency Trustee at Spergel today. Licensed Insolvency Trustees are the only professionals legally able to file all forms of debt relief in Canada, making them best placed to advise and support with your unique financial circumstances.

How much debt is too much?

While the definition of a ‘too much debt’ varies from individual to individual, generally speaking, any debt to income ratio above 40% is likely considered to be too much debt. For this reason, it is important to keep your financial goals in mind when reviewing your debt load. If it is causing you stress or mental health problems, or simply not allowing you to achieve your financial goals, it is time to begin addressing the situation.

How much does the average Canadian owe in debt?

According to Statistics Canada, the average Canadian carries a staggering $69,500 in debt. This figure combines mortgage debt, as well as non-mortgage debt, like credit card debt, student loan debts, and car loans. This number looks set to increase too, with an increase in the use of credit year over year. See how your debt compares to other Canadians in your age group.

Want to know more about ‘what is considered a large amount of debt in Canada?’ If you are concerned about the amount of debt that you owe, and are looking for a solution to reduce your debt or clear it completely, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees are here to support you with your financial goals. Reach out today to get started.

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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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