A recent survey performed by MNP revealed that 49% of Canadians are on the brink of insolvency. This number is reflective of the COVID-19 pandemic and its impact on the economy. Unfortunately, many Canadians are experiencing a loss or reduction of income at the moment which is impacting their ability to meet debt obligations. If you’ve lost or had a reduction in your income, there are tactics you can use to prevent further financial struggle.
MNP Consumer Debt Index Survey
MNP’s consumer debt index is a measure of Canadian’s attitudes in relation to their consumer debt. The consumer debt index gauges Canadian’s ability to pay bills, respond to fluctuations in interest rates, and manage unexpected expenses without becoming insolvent.
In March of 2020, MNP’s consumer debt index was reported to be 93 points. This is the lowest point the consumer debt index has ever been since 2017 when MNP started their reporting. What this means is Canadians are currently very vulnerable to financial stress.
As a result of the COVID-19 pandemic, more Canadians have reported that they’re worried someone in their household or they themselves may lose their job. In addition, many Canadians have reported that they’re not confident in their ability to cope with seasonal work, loss of income, or wage changes. In other words, many Canadians may be unable to meet their debt obligations and may face insolvency due to the pandemic.
This economic phenomenon is referred to as a “debt bubble”. Currently, there is a massive amount of debt being carried by Canadians, known as the debt bubble. This debt was manageable with regular income and employment, but the COVID-19 circumstances have restricted or cut out income for many people. If Canadians cannot afford their debt payments aggregately, the debt bubble can burst which could severely damage the economy.
In summary, loss of income is absolutely a trigger to bursting the debt bubble. It is unclear whether or not the bubble will burst at the moment, but it is something to be wary of – especially since there is no end in sight to the COVID-19 crisis yet.
Consumer Debt Outlook
Below are highlight points from MNP’s consumer debt index survey:
- 34% of Canadians are afraid someone in their household or they themselves will lose their job (increased by 7 points since December)
- 46% of Canadians are concerned about their level of debt
- 30% of Canadians expected to fall further into debt if they experienced reduced income due to job loss or change in wages
- 25% of Canadians currently can’t meet their debt obligations
- 49% of Canadians are on the brink of insolvency, specifically $200 away from being unable to pay all their bills
As you can see, many Canadians are close to insolvency as is. The COVID-19 pandemic may tip the scales resulting in a further economic crisis and burst of the debt bubble.
Ways To Handle Income Loss From The COVID-19 Crisis
If you’re worried about the debt bubble bursting and the impact it’ll have on your personal finances, stay calm and respond quickly. There are various strategies you can use before and after income loss.
Avoid Payday Loans And High-Interest Credit Cards
Payday loans and credit cards tend to have high-interest rates and short repayment periods. These forms of financing can be tempting when you’re in the midst of a financial emergency, but the reality is there are cheaper and more flexible forms of financing out there. For example, you could use a line of credit or personal loan instead.
Do your best to avoid payday loans and high-interest credit cards because they can make your financial situation worse in the long run. Even if you don’t need financial support now, consider applying for an emergency line of credit or low-interest rate credit card to ensure that you have a fund available. If you wait until the last minute, you might not qualify for financing.
Consolidate Debt
Debt consolidation is the process of obtaining a large loan to pay off all your smaller debts. The benefit of debt consolidation is you only have one monthly payment to worry about, as opposed to many, and can usually secure an overall lower interest rate. Consolidating debt now could make your monthly payment and overall debt more manageable without income.
Credit Counselling
Credit counselling is exactly what it sounds like, working with a trained counsellor to help you navigate through financial issues. Often, credit counsellors can help you create a budget and grasp simple personal finance tools to get you out of debt.
Sometimes people simply lose their way and need some guidance to get back on the right path. During this difficult time, speaking with a credit counsellor can help you feel more confident about the situation by putting a financial plan into place.
Budget
You can never go wrong with a budget. Write down your income and expenses, then devise a realistic budget for you and your household. Once you’ve created a budget – stick to it. If you can, explore obtaining another source of income and cutting out unnecessary expenses.
Apply For Government Assistance
The Government of Canada has recognized the crisis surrounding COVID-19 and has prepared an economic response plan. Part of this plan is to provide Canadians with the Canada Emergency Response Benefit (CERB), a financial assistance program. If you’ve experienced a loss or reduction of income due to COVID-19, apply for these programs for financial support.
Think Smart
The COVID-19 pandemic has caused stress in our lives in various ways, one of which is our finances. In stressful times, it’s best to remain calm because you can think clearly about the decisions you’re making. The decisions you make during this crisis could have a lasting impact – think smart!
