Is “Good Debt” a Good Idea?

Canadians are taking out debt in the name of mortgages and renovations

net worthWe’ve talked an awful lot about good debt and bad debt. A new report shows that Canadians are piling on the “good debt” (i.e. debts that can help you increase your wealth or are tied to an asset).

In their report, the Bank of Montreal examined some of the borrowing behaviours of Canadians.  They found that while Canadians continue to take on debt, there is a strong preference to use it strategically. That said, many respondents indicated that discretionary spending remains an issue in balancing their household budgets.

Some findings of the poll include:

  • 80 percent of Canadians are in debt, holding steady year-over-year
  • Canadians carry on average $93,000 in debt, which is climbing
  • At the top of the debt purchase list were: home purchases, home renovations/repairs, buying a car and education expenses

While taking out debt can be a strategic method to increase your overall wealth- either through owning a home, increasing the value of that home, or by furthering your education and your earning power, taking out debt of any kind entails certain risks,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Society of Canada.

Even if your intentions are for ‘good’ debt, life happens. You could lose your job, get sick or otherwise have your income interrupted. And then debt is just debt that you’re struggling to pay.”

Just because you can, doesn’t mean you should

If you’ve been approved for a large amount of debt, with such low interest rates, it’s tempting to take it all.  But, this is a good time to exercise restraint. This is especially relevant if you are using an open form of credit, like a line of credit, where you can rack it up over and over again. Only bite off the credit you can chew comfortably.

Be patient

If you are thinking about home renovations, think in steps rather than a total overhaul. If you can space out your projects and “pay as you go,” you’ll reduce your vulnerability in the event that one of life’s little surprises deals you a financial blow.

Think twice about driving your debt

According to this report, most of the debt dollars that Canadians are taking out are being used as a tool in their financial plan, where they hope to get a return on investment. That said, the report also showed that a large number of Canadians were taking on debt (46 percent) to buy a car; in fact Auto sales are at record highs. When it comes to buying a car, you may argue that it’s “good debt” because you’re acquiring an asset, right?  Sure, it’s an asset, but it is a swiftly depreciating asset which literally starts to go down as soon as you drive off the parking lot.

Mitigate the risk by buying a used car, or by saving up more cash, and only finance part of the purchase. Also be wary of those super long loan terms- which can go on for up to 10 years.  You’ll have smaller payments today, yes, but what do you think that car will be worth in ten years?

 

Could you use some assistance in sorting out good debt and bad debt? Maybe your overall debt load is standing in your way of moving forward to create more wealth for you and your family? We can help. Call one of our trained credit counsellors  or check out our free online debt analysis tool to get started.

 

 

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Shivani Karwal
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pr@consolidatedcredit.ca
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