Given the increase in unemployment and decrease in income faced by individuals and businesses due to efforts to stop the spread of COVID-19, many Ontarians might find themselves strapped for cash or having to rearrange their budgets.
There’s also the worst case scenario where they might find that they or their loved ones might need medical treatment before this pandemic is over.
According to an Angus Reid online survey, 25 percent of Canadians said that they are in bad financial shape due to the COVID-19 pandemic. On top of that, 25 percent of households say that they have lost work.
While the government of Canada is offering financial assistance to many of those affected by the pandemic and who have lost income, including a mortgage payment deferral, the number of Canadians who are struggling financially will probably increase before this is all over.
And, even when the pandemic does end, many more Canadians in and around Ontario are going to find themselves struggling to get out of debt.
Why do people get into debt?
Taking out a loan or using a credit card doesn’t automatically lead to debt. As long as you budget carefully and make sure you meet your monthly payments, you can avoid debt. The problem is when your financial circumstances make it difficult to make your loan payments.
If you had loans before the pandemic, there’s a good chance that during the pandemic you might need to let those payments slide a bit – either because you can’t afford them or because you needed to allocate your money elsewhere first.
If you didn’t have loans before the pandemic, circumstances might lead to you having to take out a loan to get through it – and there’s a good chance that before the pandemic is over you will find yourself struggling to make your loan payments.
Both these two scenarios of getting into debt in Ontario post COVID-19 are very plausible. While letting your loan payment’s slide is a bad idea that will not only lead you into debt but will also have a negative effect on your credit score.
As such you’re probably going to find yourself wishing and looking for some debt relief before and after the pandemic is over.
How do loans lead to debt?
Say that you had a car loan before the COVID-19 pandemic and you set aside 10% of your income to pay for that car loan.
Then, you needed to make some roof repairs so you took out a home improvement loan, and paying that back took up another 10% of your income.
So that’s 20 %of your income that needs to go to paying back loans.
Monthly Income – 20% = Money you can spend
If your income got smaller during the pandemic, maybe because you lost your job, then you are going to have less money to budget. Maybe after you’ve paid for food and utilities – you no longer have enough to pay your loans and you’re going into debt.
The longer you go not being able to pay your debts the worse it will get, almost all loans have interest rates, and this is an additional increase in the monthly payments. This means that, as the months go buy your payment gets a little bigger and – if you miss your payments – this can accumulate and make it even harder for you to pay off your loan.
The best way to get out of debt under these circumstances is to go to a debt settlement company or a credit counseling agency. The professionals in these organizations can help you negotiate with your creditors and come up with a plan so that you can pay back your debt.
In Canada, the most common type of debt relief is debt consolidation. What happens in debt consolidation is, you basically take out a loan to pay back multiple loans.
While this sounds counter intuitive, how can owing money to yet another creditor help get out of debt? But it actually works.
The way it works is it simplifies the debt payment process and – as debt consolidation loans have a lower interest rate than other types of loans – lessens the overall amount that you have to pay.
Instead of paying multiple loans, you just need to make payments for one loan, the debt consolidation loan. This makes it quicker and easier to get out of debt.