A lot of money is tainted. It taint yours, and it taint mine. 😀 That’s why it’s important to make the most of the money we do have and spend it responsibly. But sometimes if we don’t have enough money to buy what we want, we’ll need to use debt.
There’s nothing inherently wrong about borrowing money, but we have to be careful to not overextend ourselves. When we are no longer able to service our debt payments we are considered to be insolvent. The insolvency rate for Canadian consumers is only 4.2% and has been steadily declining since 2010. Here’s an interesting chart via the Government of Canada showing the distribution of insolvency by age groups.
According to the graph adults between 25 to 29 years old such as myself only represent 7.1% of all insolvency cases. This is lower than most other age groups. On the other hand, Canadians between the ages of 40 and 44 are most likely to become insolvent.
Younger adults are generally still building up their financial stories. It’s easier for younger workers to change careers. And they’re also more likely to live with their parents. Meanwhile, middle-aged folks have fewer financial options. It appears after we turn 40 we’re likely busy raising families. Salary increases are not as generous as earlier in our careers. And some of us will need to start taking care of our aging parents. This sounds like the worst time to be worrying about debt problems, yet the evidence shows this is exactly when we’re most likely to struggle staying solvent.
How can we prepare for this mid-life financial risk?
Allow me to present a brief case about debt and age groups. 😀
46% of Canadians credit card holders carry some kind of balance each month, and we all know how high the interest rates can get on those. Over time the free market has come up with solutions to provide more affordable lending to borrowers in many parts of the world. In the U.S. and Europe for example, peer to peer lending has grown significantly in popularity as consumers look for alternative means to finance large purchases and pay down high interest debts.
Canada has been lagging behind in this segment of the financial market for some time but just last year a new Vancouver based company became the first to offer a legitimate marketplace lending solution. Grouplend plans to give Canadians a fast and convenient platform to borrow money with lower interest rates than credit cards or pay day loan services. I recently had a chance to sit down with its director of business development, Sean, to learn more about possible opportunities in this space for consumers and investors.
Grouplend leverages the power of technology to bring together creditworthy borrowers seeking loans with investors looking to earn a fair return on their money in an online environment that provides personalized services with competitive interest rates. The company claims to have over $50 million of loan applications already. The way it works is pretty straight forward. Large institutions and accredited investors pool money into a fund which is lend out to borrowers. These borrowers can take out a loan up to $30,000. The term of the loan is fixed for 3 years. The interest rates start from 6.3% and goes up depending on the borrower’s income and financial situation.
I can see this benefiting two main groups of people: consumers who want to consolidate their debt or want to borrow money for a short amount of time, and investors who are willing to risk lending their money to fellow Canadians to hopefully make a return.
The borrowing process is simple. Let’s say you have a line of credit at your bank at 9% and want to lower your rate. You may be able to replace this LOC with a Grouplend loan at a lower interest rate. On the main page of its website, use the questionnaire near the bottom to get your no-obligation personalized quote in a couple of minutes. If you like the conditions and interest rate, you may proceed with your loan application. To verify your identity and credit worthiness you will need to email them some documents like scans of your drivers license, 2 most recent pay stubs from work, etc. If the application is approved it takes as little as 24 hours for the loan money to be deposited into your bank account. You can also set up automatic repayments. After 6 months of on-time payments, you may even apply for a second loan. A process that used to take weeks and meetings with a financial representative at a bank has been condensed into a few mouse clicks and keystrokes. There is no origination fee, and you can pay back the loan in full at any time without penalty. This is a great opportunity for borrowers to save money on their high interest debts. Paying less interest means becoming debt free sooner, which frees up more money for retirement savings and investing.
For fixed income investors who are looking for alternative to bonds Grouplend allows individuals to pool their money into funds that consumers can borrow from. On its FAQ page the website encourages investors to reach out by email if they are interested. Due to regulatory and securities issuance in Canada only accredited investors can invest in Grouplend funds. Generally speaking an accredited investor has to either earn a high salary or have a net worth of $1 million. An employee benefit plan or a trust can also be qualified as accredit investors if total assets are in excess of $5 million.
Today’s world is all about going digital and crowd sourcing to become more efficient. I find the start ups for marketplace lending to be an interesting development. Since almost half of Canadians with credit cards hold a balance I expect there to be strong consumer demand for a lower cost, convenient, online loan platform moving forward.
—————————————————————- Random Useless Fact:
Use the phrase, “My understanding was…” instead of, “I assumed…” so that other people will merely think you misunderstood something as opposed to being viewed as having hastily jumped to a conclusion based on insufficient evidence.
“I really like new cars. I kept on trading and trading…and I was buying a lot of gifts for people and getting more and more into debt,” says D’Arcy George who lives in Lethbridge, Alberta. Eventually his spending habits caught up to him and D’Arcy was up to $70,000 in debt and struggled with a bank account constantly in overdraft. But D’Arcy’s experience is not unique.
In a province where the average wage is over $28/hour, a sustained period of low interest rates has caused consumers to become overconfident in the economy which has led to rising consumer debt. But now that oil and gas prices have slumped some people are forced to re-examine their financial situations. 😕
D’Arcy has realized this reality and has taken dramatic steps to get his debt under control. He started a second job at Costco to make more money. He now works every day of the week, often more than 12 hours a day, and he drives a used car. “I feel more confident that I can save money and know how to handle it,” he says. “I always have a balance of $8,000 in the bank and I get worried if I have less.”
Canadians are getting the message when it comes to our consumer debt. A recent report from TransUnion shows the average Canadian individual owed $21,428 non-mortgage debt by the end of 2014. This number includes credit cards, lines of credit, student loans, and other types of credit products but does not include mortgages, home equity lines of credits, or margin loans.
$21,428 is up 2.3% compared to the previous year. However digging deeper into the number we see that Lines of Credits, which make up 40% of consumer debt, has increased by 4.4%, while credit card debt has actually fallen by 2%. In other words consumers are getting smarter about where they’re borrowing money from. People are familiarizing themselves with how credit works and are making better decisions about their spending habits overall.
The government of B.C. just tabled another balanced budget. Finance Minister Mike de Jong’s latest budget projects a surplus of $284 million for 2015-2016. This means B.C.’s $63 billion public debt is slowly being paid down. B.C. may be the only province in Canada to avoid falling into deficit amid plunging oil prices. But there’s something else that the finance minister didn’t tell us. How did this surplus happen exactly?
In order for any government to have a surplus it must take in more money than it spends. Government revenue comes mostly from tax payers. In the past I have blogged about how money in the economy is generally created by people borrowing from private banks. So I believe a major reason the B.C. government is able to balance its books is because consumers in B.C. are going further into debt. We’re essentially shifting the debt burden from the government to the private sector.
For a country’s GDP to grow there needs to be economic expansion, which means people must earn and spend more money. But in order for additional money to exist somebody has to create it first. That’s where you and I come in. Money is created whenever we borrow money from a bank. When we take out a $1,000 loan, for example, $1,000 of bank credit is instantly created which we can cash out and spend, which adds $1,000 into the existing currency supply in the economy. This $1,000 did not exist in the world yesterday, but it does now because we created the money by borrowing it into existence. This increases the country’s nominal economic output. Nice. Most of the world’s money today is created this way. Even though we are now $1,000 in debt, the nation overall is better off because our extra spending just becomes income for other people.
The opposite phenomenon can also happen. If we pay off our $1,000 loan then that money would cease to circulate in the economy and be destroyed forever through debt cancellation. This is deflationary and is what every Central Banker in the world wants to avoid. 😕