In a hurry: Canadian debt levels hit record high as ‘payment shock’ looms for some borrowers

Total debt peaks at $2.24 trillion in second quarter, up 9.2% from last year, TransUnion says

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Canadians have racked up a record amount of debt amid high inflation and rising interest rates, exposing some borrowers to financial shock when the bill comes due.

Total debt hit a high of $2.24 trillion in the second quarter, a 9.2% increase over the same period last year, according to TransUnion’s latest credit industry report. This number is also 16.4% higher than the levels seen at the end of 2019.

The number of people in debt also increased and was up 2.1% year-over-year, and 2.5% from end-2019 levels.

Consumers increase their credit balance as inflation drives up the cost of living. TransUnion said debt increased across all credit products in the second quarter, as well as among borrowers with lower credit ratings. These borrowers, known in the industry as “subprime consumers”, have curbed the use of credit during the pandemic amid lockdowns that have restricted spending and government supports that have filled savings accounts. But the trend has now reversed and these people are again using credit, indicating that rising prices are forcing some people to take on more debt to make ends meet.

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Debt repayment costs are also rising as more people take out mortgages and auto loans in a higher interest rate environment. In addition, variable rate mortgages increase along with interest rates. This forces some to reduce the amount they repay each month on their debt.

“We saw an increase in minimum payment amounts of up to 10% in the first half of 2022, depending on the mix of products consumers are holding, as well as a slight deterioration in payment behaviors,” Matt Fabian, Chief Services Officer financials of TransUnion. research and consulting services, said in a press release.

These trends are expected to continue as interest rates rise. The Bank of Canada has indicated that it will keep rates rising until inflation reaches its preferred target of 2-3%. To put that into perspective, the inflation rate was 7.6% in July, after peaking at 8.1% in June.

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A prolonged high interest rate environment creates problems for a subprime segment of borrowers, who could quickly see their payment obligations explode beyond their means, TransUnion said.

“A proportion of vulnerable consumers who do not have the capacity to meet these increased payments could face the additional impacts of the current escalation in interest rates before they come down, preparing them for an extended period of payment shock,” Fabian said.

For example, according to a recent TransUnion study, 7.8 million consumers could struggle to pay off their debts if their monthly expenses increased by an unexpected $200. A $500 increase would negatively impact 9.6 million borrowers, TransUnion said.

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And that doesn’t include the 1.5 million borrowers who would be unable to meet higher debt repayments if interest rates rose by 150 basis points, according to the study.

Still, TransUnion does not expect a massive wave of delinquencies in the coming months. Many consumers will likely adapt by reducing their spending and diverting those savings to pay their credit bills. And still others will use existing income or take out additional credit to cover payments.

“While many consumers have been impacted by high interest rates and high inflation, most have the ability to absorb payment shocks,” Fabian said.

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A protester who supported the new draft constitution holds a sign that reads

CHILEANS SAY NO A protester who has backed the new draft constitution holds a sign reading ‘Wake Up Chile’ during a protest demanding a new constitutional process, a day after voters rejected the draft in a referendum on September 5, in Santiago, Chile. On Sunday, Chileans voted overwhelmingly against President Gabriel Boric’s draft constitution, which sought to implement environmental regulations that could impact Canadian mining operations in the region. Reporting by Marisa Coulton of the Financial Post. Photo by Javier Torres/AFP via Getty Images

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  • The US Federal Reserve publishes the Beige Book.
  • François-Philippe Champagne, Minister of Innovation, Science and Industry, will make an announcement on improving the reliability of telecommunications networks across Canada
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  • Quebec unions organize a debate on the future of work in Montreal
  • A Fireside Chat with Shopify Inc. CFO Amy Shapero at the Citi Global Technology Conference
  • Today’s data: Canadian Merchandise Trade Balance, Ivey PMI; US trade balance in goods and services
  • Earnings: Gamestop Corp.

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Canada fell five places in an index that gauges how ready countries are to integrate electric vehicles (EVs) into their economies, despite a notable increase in government efforts to develop the sector over the past year.

The country ranked 13th out of 14 countries, up from eighth last year, in the latest EV Readiness Index, an annual analysis conducted by global accounting firm EY that rates countries based on their supply, demand and their electric vehicle policies. China, which operates more than half of the world’s large-scale electric vehicle battery factories, ranked No. 1.

The Financial Post’s Naimul Karim has the whole story.

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Consumer prices are 7.6% higher than they were a year ago, according to July inflation figures released by Statistics Canada. In June, it was 8.1%. Rates like these have not been seen in decades. People who remember the ridiculously high interest rates that followed the high inflation of the 1970s say to buckle up and be careful, because we are on the right track. Our content partner MoneyWise Canada offers some advice to help you through a recession from two experts who have experienced high inflation and high interest rates.

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Today’s Posthaste was written by Victoria Wells (@vwells80), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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