Dec 052014
 

Americans VS Canadians on Household Debt

Consumers love to spend money. And around this time of the year big spenders tend to have a whole lot of purse-onality. 😀 A report from the newyorkfed.org shows that Americans have a total of $11.7 trillion of household debt. Roughly 74% of that is mortgage debt. That’s aboot $37,000 of total debt for every man, woman, and child in the U.S.

Meanwhile, a recent report from the Equifax credit bureau reveals that Canadians now carry a total of $1.5 trillion of debt. This is 7.4% more than a year ago. And it works out to be roughly $43,200 per capita. But not to worry because if we remove the mortgage portion, then the total amount of debt has only increased 2.7% from 2013. This is actually quite sustainable, because if the inflation rate is around 2.7% and our debt increases by the same amount then the real value of our debt wouldn’t have gone up at all. 😉

14-12-growing-household-debt-canada

It looks like Canadians are 17% more indebted than Americans. Sorry 😐 But stable growth of household debt isn’t necessarily a bad thing. In fact, it’s what’s keeping the Canadian economy competitive. Canadians have to stimulate the economy by consumer borrowing and spending. Low interest rates have encouraged people to do just that. Auto loans showed the most significant increase, at 6.8% year-over-year. This is great news for everyone! Drivers can own new cars with affordable financing. Dealers are making more money from selling more cars. The manufacturing sector is firing on all cylinders. And total economic activity increases across the country. 😉 I don’t see any problems with this picture.

A devil’s advocate may suggest that borrowing money to buy expensive cars and speculate in the hot real estate market may not be such a smart idea. But let’s not forget that personal finance is relative. Despite the increase in debt, the delinquency rate — (bills more than 90 days past due) — remains on a downward trend and now stands at just 1.1% of all loans in Canada, Equifax said. In other words people are better off with their debts today than when they had less debt in previous years. That’s because the cost of debt is what determine’s our ability to pay it back. For example I would much rather owe a bank $100 with a 2% interest rate, than owe $80 with a 10% interest rate. Assuming these loans are amortized over many years, the latter loan, despite being a lesser amount, will end up costing me more money. 😕

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