Car Loan Debt Rises in Canada

chart with Canadian flag
Our neighbors to the north in Canada are facing rising debt levels on par with American consumers. Recent reports reveal that this is being caused by increased spending and consumer confidence, which hopefully will begin to sweep across the border and into America. A closer look at the situation in Canada may shed light on our nation’s prospective future.

The average Canadian now owes $26,768, according to TransUnion. This is an increase of 4.6 percent from 2011.

“At this time last year, we were encouraged to see consumer total debt levels remain relatively stagnant for three consecutive quarters. One year later, it appears we have reversed course as consumer total debt has increased for three straight quarters, including the largest jump in nearly two years this past quarter,” said Thomas Higgins, vice president of analytics and decision services, according to The Star.

Car loans are a large part of the rise in Canadian consumer debt. The average consumer in Canada saw an 11.25 percent increase in car loan debt, landing them at $19,228. The average credit card debt also rose, settling in at $3,573 on average, according to CTV News.

Fortunately for Canadians, the default level remains low, meaning that, despite being increasingly in debt, most Canadians pay their bills on time. The ability to repay debt is a sign of healthy—or at least stable—levels of employment since jobs are the most common source of income for consumers.

“It should be noted that many consumers are taking advantage of the low interest rate environment,” said Higgins.

Low interest rates are attractive for consumers since they allow them to borrow money—such as car loans—with the stipulation that they will have to make affordable monthly payments. A lower monthly payment frees up more money for consumers to save or spend on other purchases.

Bank of Canada’s Governor Mark Carney and Finance Minister Jim Flaherty have both cautioned that rising debt is ultimately bad for Canadians and the national economy. Higgins echoed their sentiments.

“I was not expecting it to rise as much as it did. This is the biggest jump-up we have seen in almost two years. At some point in time, we have to stop spending at a rate more than we are growing our earnings,” said Higgins, according to the Globe and Mail.

The rise in car loan debt is due to increased purchases of cars in Canada. Sales rose 8.1 percent in August compared to one year ago. Part of this increase in sales is due to a changed economic outlook in Canada where the recession is believed to be long gone, according to the Globe and Mail.

“Now things are better, we are out of the recession, we are not hearing terrible things about the U.S or Europe anymore…so people have started thinking that it is time to get a new car,” said Higgins, according to the Globe and Mail.

Previously, most Canadians held off on borrowing car loans and landing themselves into debt. Instead, they drove used cars and paid off their existing auto loans—clear signs of a frugal mindset and economic uncertainty. But with economic news improving, some have thrown caution to the wind, or at least decided to indulge themselves in purchasing new vehicles. Additionally, used cars have limited life spans until their overuse and breakdowns makes new vehicles more cost effective.

“I do not dismiss that we have too much debt, we know that,” said Benjamin Tal of the Canadian Imperial Bank of Commerce, according to the Globe and Mail.