With the finances of many Canadians in a precarious state during the pandemic, now is a good time to get your financial house in order
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Sep 29, 2020 • • 5 minute read
With COVID-19 leading to job losses and lower income levels across the country, many Canadians are taking on more debt, often from multiple sources, to make ends meet.
The household debt-to-income ratio — which the Bank of Canada considers a key indicator of the stresses facing Canadians — dropped to 166.8 per cent in the second quarter from a revised 171.7 per cent in the first quarter, but analysts believe the drop is partly due to record government support through the Canada Emergency Response Benefit.
“We remain concerned that some households will still struggle to keep up with their debt payments over the next year amid a slow economic recovery and challenging labour market conditions — even with government support being extended,” Josh Nye, senior economist at Royal Bank of Canada, said in a note to clients earlier this month.
With the finances of many Canadians in a precarious state, now is a good time to analyze your debt levels and get your financial house in order. Here are five ways to get started on eliminating debt, whether it’s your ballooning credit card bill, auto loans, personal loans or lines of credit that have left you with a seemingly insurmountable pile of debt.
The first step to approaching a major debt is to see where your money is going and where you may be able to make savings.
“What we want you to do is sit down and map out your current situation; make a list of everyone you owe money to and what the interest rates are on them,” says Doug Jones, president of BDO Canada Ltd. “Then we want you to start to work on your budget. What is your monthly income? What are your fixed monthly expenses? What are your minimum payments?”
The goal is to create a budget that has some money left over so you can start paying more than the minimum payments on your debts.
Tackle high interest debt first (and try asking for lower rates)
Tori Dunlap is a Seattle-based money expert who often deals with clients looking for help with debt. She says her first piece of advice is to always start with the highest interest rate first. “Debt can feel so tricky to get out of because when you’re paying monthly payments, or when you’re trying to send in money, what’s really happening is you’re not just sending in money to your original amount of money that you put on the credit card, you’re sending in money to the principal plus the interest,” she explains.
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Dunlap says it’s best to funnel any extra money you have toward your principal balance of your debt, or the one with the highest interest rate, while still paying all other minimum payments if you can. She also notes that interest rates, especially with credit card companies, are often negotiable.
Consolidated loans and lines of credit
If you’re in a position where you may not be able to even make your minimum payments, BDO’s Jones recommends looking at some other options.
“So you could get a consolidated loan at a much lower interest rate than you were paying on multiple credit cards,” he said. This type of loan allows you to pay a single monthly payment with a low interest rate rather than many small ones with higher interest rates.
Another strategy for finding payment plans with lower interest rates is to take out a secured line of credit against your home, Jones said. “What we don’t want people to do when they’re going through this process is to go to the payday loan type places to try to make up for any shortfalls, because they come at an extremely high interest rate,” he said. Higher interest rates could push you even further into debt.
Consumer proposal or a debt management program
If your debt is severe enough that you can’t manage it informally through the strategies above, Jones says it’s time to seek external help. While he says debt management programs don’t technically exist in Ontario, credit counselling agencies can help in the same way. “They’ll look at your budget, write to your creditors asking the creditors to reduce interest rates to as close to zero as possible, and give you a five-year window to repay your debt,” Jones said.
However, he notes that debt management programs mean you will pay 100 per cent of your debt along with a fee charged by the credit counselling agency.
If it’s unlikely you will ever be able to repay the full amount, another possibility is a consumer proposal, said Jones. “It’s an alternative to bankruptcy that offers your creditors a payment plan for up to a five-year period.”
You must consult with a Licensed Insolvency Trustee (LIT) and get a majority of your creditors to agree to the consumer proposal. But once approved, you will not have pay back 100 cents on the dollar and there are no interests or penalties under federal law.
While the word is a scary one, Jones says bankruptcy is just another solution to debt. If you’re someone who doesn’t have any assets to go towards a consumer proposal, this is the option for you. “It allows them to get a full fresh start once they’re out of debt,” he said.
An LIT is also necessary for the process of filing for bankruptcy.
Mike Comrie, assistant vice-president of BDO Canada, says that even while dealing with extreme debt, it’s important to have savings available for an emergency fund. “What we often see is somebody, after they pay for their basic living expenses, might have only just enough to make their minimum payments. The problem with that is, when that emergency hits, they don’t have any savings, and because they don’t have any savings they have to borrow.”