Our blog

Many Canadians use debt to purchase their homes, start a business or to receive a post-secondary education. The total household debt statistic takes an accumulative approach to see what households owe in relation to disposable income. Trouble can be brewing on a national level when debt greatly outweighs income.

A recent report by the Organization for Economic Co-operation and Development (OECD) claims that Canada’s household debt levels are higher than other countries. This report acts as a warning sign to our national economy. 

OECD’s Report

This economic report frames the current economic situation through the lens of the 2007 credit crisis. A reason for that crisis was the increase in household debt across the board. Since that time, most nations have lowered their debt load, yet for some reason, Canada has not followed this trend. In fact, it’s done the opposite.

At 101%, Canada’s household debt to gross domestic product ratio ranks last. To compare, the U.S’ ratio is 80%. Italy is barely scratching 40%.

Why are Canadians Relying on Debt?

The easy culprit to pin Canada’s debt crisis on is real estate. As housing prices increase in value, Canadians must borrow more to be homeowners. Borrowing doesn’t end with mortgages, though. From heat to furniture to maintenance, Canadians use debt to keep their homes running.

In places like Vancouver and Toronto, thriving housing markets impacts the rental market, forcing many renters to live off debt. As Canada’s population grows, the debt load per household for both homeowners and renters will rise.

Possible Solutions

Household debt is a problem that has surfaced for most western countries. The simple solution (if there is one) is for Canadians to spend more within their means, curbing their reliance on debt. It could be as straightforward as families getting by on one car instead of two, but in fairness, this is always easier said than done.

Measures to protect borrowers and lenders from skyrocketing prices is the most immediate way to reduce debt load. The Government has taken steps through implementing a stress test and a recent interest rate hike by the Bank of Canada could provide some relief.

The data provided by this report should be taken very seriously by Canadians and policy makers. It’s a situation that needs to be monitored and handled before the ratio becomes even more out of whack.

In Canada, two credit bureaus are responsible for calculating credit scores. Equifax and TransUnion issue scores between 300 and 900 as a way for lenders to assess borrowers. As a general rule, 650+ is what a lender likes to see from a potential borrower. Anything below 600 is a concern for lenders and may limit a borrower’s options.

Credit scores are a mix of your current situation and your past behavior, such as missed payments. A critical factor in determining credit scores is debt. The Bank of Canada notes that Canadian household debt has been growing for thirty years. Average household debt now stands at 170% of household income.

A bad credit score can develop to the point where you can no longer get help to fix the problem. More households are carrying credit score damaging debt, and more are denied assistance.

So, what can citizens do if they need to borrow money but have a bad credit score?

Alternative Lending

Credit scores are essential across the financial industry. Yet, different lenders emphasize it differently.

The big six Canadian banks rate credit score as a significant factor in the approval for loans - this is partly business preference, and partly national legislation. The main problem with this approach is that it doesn’t focus on the main criteria for a loan. Can a borrower afford it with their current financial setup?

The problem can be even more acute for some borrowers - borrowers who are seeking a second mortgage, for example. The most common reasons for a second mortgage are to pay off outstanding bills and pre-sale home improvement. In both these instances, the borrower is going to be better off in the short term than they are today. Lending to them should focus on that and their ability to pay.

A citizen may have a period in their life where they have been financially irresponsible. So, they need to get a loan to merge and manage their debts. They will likely be turned away by the banks and left to face bankruptcy - this is where alternative lenders have made their mark. Ranking borrowers on their potential to pay means they can work with people no longer supported by the mainstream.

Alternative lending has seen consistent growth over the last ten years. Strict regulations and emphasis on credit scores are forcing lenders from the mainstream. What they find with alternative lenders is an emphasis on the role the loan will play in the borrower’s life.

Alternative Lenders

Besides offering services the big banks don’t, alternative lenders compete with them. Many alternative lenders are specialized businesses whose trade is lending. They fight for customers of all types and have a range of products that most banks do not.

With searching, borrowers can find better deals with alternate lenders than the mainstream. Recent surveys show that satisfaction with alternative lending is leading to permanent change. More than half of those approved for alternative loans said they would be unlikely to return to the mainstream.

Alternative lenders offer borrowers a way to improve their financial situation.

Taking an Alternative Approach

One of the biggest hurdles to finding an alternative lender is the choice available. Unlike the big six banks, there are many different kinds of alternative lenders. It can be hard to know where to start once the mainstream lenders reject you.

Canadalend.com has a range of independent experts. They have many years of experience in the mainstream and alternative financial markets. When you talk to someone at a bank, the bank incentivizes them to sell you a specific product. Our experts will help you find the right product for you.

If you contact Canadalend.com today, we can be your guide to the many alternative lenders out there. We can help you find the product you need to meet your financial aims.