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Inflation woes: Experts urge caution as new survey finds 1 in 4 Canadians taking loans

Click to play video: 'Here is why taking a loan to fight Inflation is not a good idea, according to expert'
Here is why taking a loan to fight Inflation is not a good idea, according to expert
WATCH: Here is why taking a loan to fight Inflation is not a good idea, according to expert – Aug 21, 2022

One in four Canadians confessed to taking on debt in 2022 to pay for higher costs of living, a new survey has found. It’s a trend that has some experts sounding the alarm.

When dealing with inflation, taking on any sort of loan to help pay bills should always be a “last resort,” one expert says.

The survey, conducted by Canadian personal finance comparison site Finder.com, asked more than 1,000 Canadians from July 14 to 18 how they were adapting to inflation this year.

Twenty-four per cent of the respondents confessed to taking on debt to pay for higher living costs in 2022, with the top three reasons for taking loans being to cover bills, to consolidate existing debt and cover living expenses due to job loss.

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Moshe Lander, a senior lecturer at the Department of Economics at Concordia University, suggests finding ways to cut back on spending instead of taking on loans. That could help Canadians economize without necessarily having to resort to loans.

“When you’re dealing with inflation, the idea of using any sort of debt to help pay your bills should always be seen as a last resort,” he said.

Current inflation is unfortunately something Canadians are “just going to have to deal with” even though the Bank of Canada can bring this under control to a degree, said Lander. During inflation, added Lander, interest rates will inevitably be increased.

So, by taking a loan “You’re actually hurting yourself in two ways,” said Lander. “One, you’re buying something you can’t afford to begin with. And two, you’re going to pay for it with a loan where the interest on that loan is going to go up, which means that you’re going to continue to pay for it in a more expensive way than if you had never taken on that payment.”

Click to play video: 'Ask an Expert: Tips for beating inflation'
Ask an Expert: Tips for beating inflation

The annual rate of inflation was 7.6 per cent in July, down from an 8.1 per cent gain in June, according to a Statistics Canada report on Aug. 16.

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Romana King, a senior finance editor at Finder.com, says taking on debts — usually in the form of credit card or short-term loans — becomes a big problem because “unplanned or unexpected debt is usually more expensive.”

This can be a really tough cycle to break out of, she says.

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How to avoid debts?

King says a lot of personal finance experts would tell clients to not take on the debt, but the reason why people take on debts are because they “feel a necessity or need.”

“What you need is a good strategy or a good solution to figure out how you can pay that debt back and get back on track,” said King.

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Besides cutting on expenses, King said Canadians can learn to negotiate and try comparison shopping. That often helps save money.

“Don’t forget you can cut costs on insurance, cable, streaming services, even grocery bills,” said King.

Click to play video: 'Business News: July inflation numbers'
Business News: July inflation numbers

King says people can also look at where they can consolidate the debt by reducing short-term loans or paying off credit card debts that have higher interest rates.

“This can reduce the overall burden or cost of the debts, and frees up more money to pay down the debt, so you’re out of debt faster,” King added.

“You have to find a way to make (income) stretch as far as you can, without relying on big fat wage increases,” said Lander, adding that a raise might satisfy Canadians temporarily but, “it’s gonna backfire” in the long-run.

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Lander, however, says that some loans such as paying for mortgages are justifiable as long as it’s affordable. Individuals or families should have the income to sustain their lifestyle and be able to pay off their debt.

He cautions that that taking on a loan to deal with inflation may also result in an individual being cut off by the bank at some point when they are no longer able to sustain it.

“At that point that you’ve left yourself with very, very little options where you’re gonna have to go with extreme cutting, because you’ve taken on all of this debt,” he said.

“So better to address it early on, and rein in that spending and make sure that debt is only used for something that’s creating some sort of sustainable benefit, rather than merely getting through current expenditure.”

— With files from Global’s Craig Lord

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