We know that debt damages our finances and that buying on credit threatens our financial balance. But does “good debt” exist? And if so, how can you tell the difference from those that can be called “bad”?
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With a debt ratio continuing to grow, according to Statistics Canada, reaching nearly 182% in the second quarter of 2022, Canadian households are not lagging behind in terms of debt.
Income never seems to be enough to cover all expenses and consumers take on consumer debt, mortgage debt, car loans, etc.
But is everything as bleak as it seems, or are there debts less toxic than others?
Debt that creates value
Financial planner and financial security advisor André Lacasse distinguishes debt that creates value from debt that doesn’t. “Any guilt that makes us richer, like a student loan to go back to school to improve your condition and earn a better salary after graduation, can be considered ‘good’ guilt,” he explains.
In addition to a higher salary, we also have the opportunity to have a job that we love and that pushes us to surpass ourselves. Being happy at work is not only very positive, it probably offers great career development opportunities.
Another good debt is that incurred for buying real estate. “Even if the real estate market has seemed uncertain in recent months, the fact remains that a property generally increases in value over the long term and represents a sensible investment,” specifies André Lacasse.
This wealth generally occupies a large place in household wealth and retirement planning. After leaving the labor market, the purchase price of the single-family home even contributes to financial security in old age.
“Another strategy is to remain tenants and invest in a TFSA, for example, the difference between what a mortgage would cost us and the amount of rent actually paid,” says André Lacasse.
However, he notes that one must be extremely disciplined in executing this strategy, not to mention the fact that rapidly rising rents could make it irrelevant.
Debt that impoverishes
On the other hand, bad debts are legion. Just think of all those charged with purchasing consumer goods – furniture, clothing, cars, recreational vehicles, etc. – or indulge in outings, leisure activities, outings, etc.
With very high interest rates, credit cards (19.99% on average) and even worse debit cards (up to 30%) won’t give you a free quote if you don’t pay the full amount in the next billing cycle.
Financed (buy now, pay later) or installment purchases also promote debt by giving the impression that the monthly amount is not that high and that you can afford it.
Car purchases should also be kept in mind. As a result, consumers tend to take out financing terms for longer and longer terms, and once the vehicle is paid for, it has lost virtually all of its value. Same problem when buying recreational vehicles, personal watercraft, snowmobiles, boats, etc.
When it comes to long-term vehicle leasing, the desire to change cars before the end of the term often results in the consumer returning the vehicle to the dealer and leaving with a newer and more expensive model.
Result: The balance of the previous purchase is “shoveled” into the new payment arrangement, creating negative equity (the famous “balloon”) that will be expensive and long-term.
However, André Lacasse brings a nuance. “A car is not always a bad debt. It mainly depends on the price, but also on whether it is necessary to come to work or to take the children to daycare, for example,” he says.
In any case, whether good or bad, the planner recommends carefully analyzing the situation before taking on new debt.
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