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The Debt Trap

Many young Canadians are relying on payday loans to clear their outstanding debt

Millennials are trapped in debt

Millennials are much more likely to use payday loans than any other age group in Canada, according to a recent survey by debt management company Hoyes, Michalos & Associates.

As it turns out, 14 percent of Canadians saddled with debt and unable to pay it off are between the ages of 18 and 29 — and 38 percent of this group use high-interest payday loans as a method to pay off their debt, digging them even deeper into the debt hole.

Break down the numbers even further, and a picture emerges of a generation of young Canadians unable to get a grasp on their finances because of student loans, low incomes, or no income upon graduation, and the high cost of urban living.

In 2016, for instance, young Canadians owed almost $30,000 in debt. Their average monthly income? A mere $2,000, before taxes. On that kind of income, you can probably afford to pay back only $200 of your debt each month.

Let’s assume you studied in Ontario and most of that debt is from student loans. Using this handy OSAP (Ontario Student Assistance Program) calculator, you’ll find that $200 doesn’t even meet the minimum payment requirements per month. You’re allowed 14.5 years to pay off your debt — on an interest rate of 3.5 percent, you can only pay off that thirty grand by putting aside $257 per month.

The Danger of Payday Loans

It is indeed easy to succumb to the lure of payday loans when you’re constantly in the red and can’t afford to meet your monthly loan payments. The immediate perk of loan shops like LoanAndGo, Captain Cash, and Cash Money is how quickly you can obtain cold, hard, cash without a credit check. It’s also easy to ignore the ridiculously high interest rates attached to these loans because you need and want the money right away, so you don’t miss payments on the other bunch of outstanding loans that you’ve accumulated.

In 2008, Ontario enacted the Payday Loans Act to limit the interest charged on loans to roughly 15 percent annually. The way the math works, that basically means for every $100 you borrow, you owe $21 to the lender. But it’s rare to find a payday loan shop that actually adheres to this rule. Most strike individual deals with borrowers, capitalizing on their desperation by charging interest rates of up to 40 percent sometimes — you’re now terribly buried in that debt hole.

“Job insecurity and the lack of a financial safety net, including an emergency fund, increases the risk that a young millennial will end up becoming insolvent once they begin to add to their student debt with credit cards, payday loans or other unsecured debt,” write the authors of the Hoyes, Michalos survey.

The Student Debt Trap

Half the debt battle would be won if students didn’t have to take out loans for tertiary education. The most recent calculation of student debt by the Canadian University Survey Consortium pegs the average student debt at $26,819. This, coupled with the fact that Canadians aged between 18 and 29 are the most underemployed and have the lowest income of all age groups, makes paying off student loans in their entirety one of the most daunting post-graduation tasks.

In its 2017 budget, the federal government increased its allowance for the Canada Student Grant program, meaning that a higher proportion of loans you take out for school, are in the form of a grant that you don’t have to pay back.

In the short run, that certainly helps. But the larger issue with debt is the fact that incomes have stagnated for so long in Canada, while the cost of living has gone up, making it impossible to live a debt-free life, especially when you’re young and your income is below average.

What doesn’t help are fairytale stories that tend to go viral (mostly because of their absurdity) about Joe and Jane who paid off $100,000 of debt in a year, and have retired in the Maldives at the tender age of 35. They are, for the most part, anomalies. Realistically, you have to be a high income earner (think doctor, banker, trader, lawyer)  to pay down your debt quickly.

For the rest of us, it’s an uphill battle, one that requires careful long-term planning, and the sacrifice of current consumption for any semblance of future savings.

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