Economic downturn presents debt consolidation opportunity

While stocks and commodities have corrected lately, Canadian consumer debt keeps growing, to the point where the average Canadian now owes $1.63 for every dollar they earn. Let this market decline be a sign that it’s time to look at debt consolidation—taking advantage of lower interest rates to pay down debt and avoid the possibility of bankruptcy.

Last week’s stock-market losing streak came to a head with the 2015 edition of Black Monday, a downturn that saw the S&P/TSX Composite Index fall 700 points while the Dow Jones Industrial Average in the U.S. dropped by 1,000. Though markets later recovered, the six straight days of declines was the longest such stretch in three years.

And it’s not just the stock market that’s fallen of late. The price of oil, which had been trading at over $100 a barrel last year and $60 a barrel in June, dropped below 40 bucks a barrel last week, which was unpleasant news for the Alberta oilpatch.

The decline in oil prices, and its subsequent impact on the Canadian economy, has led the Bank of Canada to cut its target interest rate from 1 per cent to 0.5 per cent already this year. Some experts believe that further cuts are in order, predicting that the rate could fall to 0.25 per cent next week. This would be the lowest rates have been since the global financial crisis in 2009, presenting Canadians with a perfect opportunity to pay down debt.

Unlike the price of oil and stocks, insolvency in Canada has actually been on the rise, increasing 1.2 per cent for the six-month period ending in February. Although bankruptcy among Canadians has actually fallen by 4.7 per cent, the number of consumer proposals rose 9 per cent. And while Alberta insolvencies increased by 6.5 per cent, that paled in comparison to Manitoba and Saskatchewan, where consumer insolvencies rose nearly 11 per cent.

But while the threat of bankruptcy is real for many Canadians, consumers remained incredibly optimistic in the days leading up to Black Monday. The Bloomberg Nanos Canadian Confidence Index climbed to 53.2 for the week ending Aug. 21, its biggest increase since May 2014. And 34.1 per cent of Canadians believe that home prices will rise in their neighbourhood in the next six months, which is the most optimistic they’ve been in almost a year.

There is clearly a disconnect in our thinking here. Despite tumbling markets, plunging oil prices and a the real possibility of a technical recession in Canada, many people are holding out hope that house prices and the economy will rise, increasing their debt load from $76,140 to $93,000 in the past year. As economic evidence suggests otherwise, debt consolidation should become a top priority in the coming months. There are a few different approaches you can take to pay down debt, including:

Debt snowball: List your debts in order of smallest to largest, and pay down the smaller debts first, while making minimum payments on the rest. A recent study has found that paying off small debts first can provide the motivation to help reach the larger goal of being debt-free.

Debt avalanche: List your debts from highest to lowest, and pay the minimum payment on all of them. When you have any extra cash from savings, or receive unexpected money from a tax return, for instance, use it to pay off the debt with the highest interest rate—the opposite of a debt snowball.

Debt consolidation: You can get a loan to combine and pay off multiple debts. But make sure you’re getting a good deal. The interest rate on your loan ought to be lower than what you would pay on your other debts to give you a lower monthly payment. You should also ask about any additional service charges.

Are you taking advantage of lowered interest rates to pay down debt? Share your thoughts with BDO by joining the conversation on Twitter using #LetsTalkDebt