Think before you borrow

Photo courtesy of GotCredit (Flickr)

A report from the Fraser Institute states that Canadians are carrying a large amount of debt, and that this may not be that bad. Philip Cross, a former chief economic analyst at Statistics Canada, states that our debt is generally being used as an investment for financing an education, obtaining a mortgage, or starting a business.

He believes that taking out loans for such ventures will pay off, and that our debt is under control — especially given that Canadians are “locking into low rates,” thus decreasing the risks of their overall debt.

I agree with Mr. Cross that loans taken out for education, a mortgage, or starting a business can be beneficial, but it really depends on whether your education, mortgage, or business will become a true asset — generating income — or remain a liability.

To take out loans in order to learn a trade or an applied science is generally going to guarantee financial independence. However, it’s financially risky to take out tens of thousands of dollars to pursue whatever other academic studies that might not guarantee you a job.

If you happen to major in one of these fields, it may leave you unemployed or working three low-paid part-time jobs just to live. Meanwhile, compounding interest begins to accumulate on those loans. A Bachelor’s degree can be an asset, but majoring in a field that is low in demand and taking out massive loans to pay for it can also be a liability.

To take out tens of thousands of dollars to pursue certain academic studies that don’t guarantee you a job is financially risky.

Even if you manage to put your college or university education to good use, another form of debt awaits: your mortgage. The Canadian Real Estate Association states that Canadians have taken on nearly $8.3 trillion in mortgage debt. And while the average individual income according to Workopolis is $49,000, the average cost of a house is roughly $450,000.

Even if one has a spouse to help pay for the mortgage, it could take more than a decade to pay off. And this excludes a lot of other sizeable expenses such as utilities, educational loans, vehicles, children, and unexpected events such as unemployment, spousal separation, or career change. While some people believe that their house is an asset, it is actually a liability, unless you’re renting it out.

If you’re interested in starting a business, I think this is a fantastic idea. But know it is associated with a lot of risks.It usually takes at least a few thousand dollars, yet, according to statistics published by the Small Business Administration, roughly half of all business establishments endure for only five years, and only a third make it past 10.

So, if a business is part of your plan, it might be a better idea to save enough money to start your own, being that it only takes a few thousand, than to take out loans. This way you won’t be indebted to the bank if your business isn’t successful.

Philips Cross seems a bit optimistic about our supposedly overblown debt crisis. So I’ll be the voice of reason: using loans for the aforementioned reasons can definitely be beneficial, but doing so  really requires knowledge, reason, and foresight.