Many Canadians facing financial problems are using debt tools to continue to service their debt and pay ongoing interest fees as opposed to fund spending, says Doug Hoyes, a trustee with Kitchener, Ont.-based Hoyes, Michalos & Associates Inc., a consumer proposal and bankruptcy trustee firm.
“This is a cycle of debt that ultimately leads to insolvency,” he adds.
Holt is reacting to his firm’s research report, “Joe Debtor: marginalized by debt,” which found that, though credit card debt is decreasing, the expanding popularity of payday and fast cash loans is putting those already in debt further in the red.
Almost one-fifth (18%) of insolvent debtors have at least one payday loan, compared to 12% two years ago. The study also found that middle-income earners, not low-income individuals, are more likely to be overly dependent on these types of loans.
The number of debtors with fast cash loans has also risen to 5% from 1% two years ago and 78% of these borrowers also had a payday loan.
The typical insolvent debtor pays a blended interest rate of 19% or about $899 in interest, which is equal to 37% of this individual’s take-home pay. High debt service costs cause people to borrow in order to make minimum payments, resulting in more debt and higher debt service costs.
The report found that debtors who were 60 years old or older had distinction of having the highest payday loan debt of all the age groups that were studied in addition carrying the most debt overall.
Single parents are also susceptible to being insolvent debtors, with almost one in five being in debt. When single mothers are considered, that number rises to three out of four. These parents tend to struggle with fixed repayment debt, such as car loans and student loans. They are also more likely to have debt in collections than other debtors.
The report also found student loans to be a problem for debtors, with 13% claiming these types of loans. More than half (60%) of these debtors are female. The average female in debt owed $14,748 in student loans, which is 19% higher than male debtors.
“Although female student debtors earn slightly more than male debtors, they are more likely to have unstable income making it difficult to remain on top of student loan repayment,” according to the firm.