Consumer debt loads cause for concern

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In rating agency Moody’s report this week, Canadian consumer debt was listed as a problem that looms over the horizon.

The agency warns that the credit quality of Canada’s biggest lenders is under threat in part due to longer terms on car loans, and the fact that more than half of Canadian mortgages will see rates increasing this year.

As a consequence of tougher lending rules, many Canadian mortgages are now uninsured, which in turn is a threat to lenders.

The very real possibility of delinquent loans means banks should brace themselves and prepare for that risk, says Moody’s.

Higher interest rates could be a trigger for that admittedly unlikely event.

The Bank of Canada has hiked its benchmark interest rate three times since the start of 2017, and expectations are for at least two more this year.

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But it’s not just mortgages. The Moody’s report also raises concern about car loans, which are getting longer and longer.

The average new car loan in Canada is currently spread out at almost six years. At that timeline, it’s very likely the car will be worth far less than what’s owed on it for multiple years on the tail end of the loan.

Last year Mark Buzzell, chief executive officer of Ford Canada, told media in an interview at the Vancouver auto show that Canadian automakers were selling 41% of their vehicles with loans of six or more years. He also pointed out that many loans stretched out to eight or nine years. This trend doesn’t seem to have changed at all and given the uncertain economic forecast and interest rate hikes going forward, consumer debt will be the ticking bomb. – CINEWS

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