COVID-19 – Update on consumer debt

By : Maryse Guénette
Photo Credit: Steve Buissinne (Pixabay)

For one Ontario-based organization, the pandemic has provided an opportunity to shed new light on indebtedness in low- and moderate-income households, revealing some interesting data and some possible solutions.

When COVID-19 first appeared, consumer debt levels had already reached disturbing heights. Since then, there have been massive job losses, with more than 5.5 million Canadians seeing their incomes reduced. The assistance programs offered by the federal government have helped consumers keep their heads above water, but those programs will not go on for ever. What will happen afterwards?

To find out, Prosper Canada, a non-profit organization based in Toronto, conducted a study called Roadblock to Recovery: Consumer debt of low- and moderate-income Canadian households in the time of COVID-19. “We looked at the situation of people living on low incomes and those living on moderate incomes,” says CEO Elizabeth Mulholland. “…because, depending on their budget, many people go back and forth between the two categories.”

According to the expert, the study was needed because generally reliable data can be deceptive.  “The figures include mortgage debt,” she says, “but people living on low incomes don’t have a mortgage. Besides, the data don’t show the disparities between various groups of Canadians. Visible minorities and indigenous peoples are among those most likely to have financial problems.”


A worrying situation

Mulholland notes that half of those living on a low or moderate income have no debts. But for those who do, the amount can be considerable: in many cases, these consumers are spending one-third of their incomes just on repaying their debts. “This situation is extremely worrying,” she says.

People living on low incomes have just enough money to meet their needs, or not quite enough. So if a high proportion of their income goes to repay their debts, how can they also pay the rent and put food on the table?”

Elizabeth Mulholland, CEO of Prosper Canada

Government support designed to help consumers during the pandemic has certainly been beneficial; in fact, the expert notes that the programs have even left some people in better financial shape than before. But the support programs have created a false sense of security. “Some people may have the impression that their personal finances haven’t suffered from the pandemic,” says Mulholland. “But their debts are still there, and they will have to repay them one day. They may also have taxes to pay on the sums received from the government. That could be quite a challenge for them.”


Who’s to blame?

You might think that credit card debt causes the most problems. While that is the most common form of debt, it only accounts for a small proportion of total indebtedness. By contrast, student debt, found almost exclusively among low- and moderate-income people, is very high: the median is $12,000 for people living on low incomes and $15,000 for those on moderate incomes. So it’s very hard to pay it back, even you’ve finished your studies. “Also, the problem is that loans and bursaries provide money for tuition, but not for all the related expenses,” Mulholland points out. “The amount isn’t high enough, so many people have to drop out before they get their degrees. So they find themselves in debt, but they have no credit to improve their job prospects.”

Long-term car loans – seven or eight years – also pose a problem. “With that type of loan, the consumer runs a real risk of having a debt that’s higher than the value of the vehicle after a few years,” says Mulholland. “And he or she may also have to keep on paying for a car that no longer runs.” For workers from rural areas or suburbs with poor public transit, a car is essential. No longer having a car can even mean losing your job.


How to bring about change

Mulholland believes it’s important for governments to focus on problems related to student debt and long-term car loans.

Over the past three years, most of the provinces have improved consumer protection by passing legislation on payday loans,” says Mulholland. “And that has produced results. Now it’s time to pay attention to other types of high-interest loans. To bring that about, governments, financial institutions and consumer groups will need to work together.”

Elizabeth Mulholland

Mulholland is optimistic because she knows solutions do exist. The report published by Prosper Canada mentions various decisions made in the UK, Australia and New Zealand. Among these is microcredit – giving small low-interest loans for the purchase of essential goods. Here in Quebec, Option consommateurs offers just such a product, in conjunction with Desjardins, to replace payday loans, which are prohibited in Quebec, as well as tools based on consumers’ needs to help them find the financial products that suit them best.

The report also suggests that new studies are needed, notably on why consumers fall into debt. “We need to think about what we can do now, and also what we need to do in the future,” says Mulholland. Because many people still need help – and that’s not about to change any time soon.

The study

The study, Roadblock to Recovery: Consumer debt of low- and moderate-income Canadian households in the time of COVID-19, looked at debt levels among lower-income consumers. Zeroing in on why, how much and what kind of debt consumers have, the researchers found information that can be used to help Canadians to maintain or rebuild a certain level of financial stability once the economy recovers.

The researchers analyzed data from Statistics Canada’s 2016 Survey of Financial Security (SFS), which does not include households living in the territories, on reserves or in seniors’ residences. They also looked at relevant Canadian studies and data overall. Finally, they examined initiatives in effect in the UK, Australia and New Zealand to help consumers avoid getting into debt or get out of debt.