Increasing Canadian Consumer Debt Pushes Borrowing Limits

Lending growth could slow until borrowers catch up on their payments.

Consumer household debt is increasing in Canada and policymakers say the trend could slow lending growth in 2014, according to a recent Canadian Press article. 

Interest rates on loans have been low in Canada for years, causing consumers there to borrow at record amounts. Policymakers are concerned that an increase in interest rates now would cause consumers to fall behind on their loan payments, according to the article. They are also worried it will cause a decline in the housing market and consumer spending.

During the third quarter of 2013, household debt increased to 163.7 percent, meaning Canadians owe nearly $1.64 for every $1 in their disposable income earned in one year, according to the article.

Despite these trends, Canadian Prime Minister Stephen Harper suggested it’s too early to panic. He said he believes the Canadian economy is strong but urged consumers to exercise caution when considering their debt level and future interest rates.

Bank of Montreal Chief Executive Bill Downe told The Canadian Press that a slower increase in debt held by Canadians would lessen the dependence on consumers for overall economic growth. He added that U.S. business loans could increase in the banking industry in 2014.

“We’re going to benefit from continued strong commercial and industrial loan growth and I think that’s going to spill over into Canada,” he said.

However more consumers, even if they have less debt in the future, could be spending money on overdue bills instead of saving for the future, according to the article. It states, based on a credit score analysis poll from FICO, that 32 percent of respondents are expecting an increase in credit card delinquencies in the next six months.

A majority of the debt is expected to be from unpaid auto loans, which could reach their highest level since the fourth quarter of 2012, according to the article.

Source: ACA