What are the risks of a high debt ratio?

A high debt ratio can have significant consequences on your financial situation and overall well-being. If this is the case, being aware of it should motivate you to take corrective measures to avoid a debt spiral.

Here are some signs and consequences associated with a high level of debt:

  1. Difficulty in meeting monthly payments: A high debt ratio means you are dedicating too much of your income to debt repayment. This not only threatens your goal to have a balanced budget but it can also lead to difficulties in meeting monthly payments on your debts. Any delay can have negative repercussions on your credit history for up to 6 long years.
  2. Financial stress: Living with too much debt can result in persistent financial stress. This situation can affect your concentration at work, your relationship with your spouse or partner, your health and your sleep.
  3. Limitation of future borrowing opportunities: A high debt ratio can restrict your ability to take out new loans for projects such as buying a house, renovations, or retirement plans. Moreover, even if you are eligible, a high debt ratio generally results in a higher interest rate due to the increased risk for the creditor.
  4. Reduction of savings and investment opportunities: With a lower debt level, the funds currently allocated to debt repayment could be redirected towards savings or investments, offering you long-term return opportunities and better financial security.
  5. Impact on quality of life: Financial obligations resulting from too much debt can be a source of stress and can reduce your overall quality of life. You may be forced to make difficult choices in terms of expenses, limiting your ability to enjoy enriching experiences or invest in activities that promote your well-being, such as travel, vacations, or personal projects.
  6. Risk of over-indebtedness: Excessive debt increases the risk of being caught in the debt spiral: more debt means higher monthly payments, which increases the risk of a budget deficit. A budget deficit often gets financed with access to new credit. But new credit increases monthly payments and this spurs an endless cycle until access to new credit becomes impossible.

Monitoring your debt ratio closely is crucial to ensure that your debt level is sustainable and does not become worse over the years. A debt ratio exceeding 35% should be a warning signal, prompting you to take preventive measures such as developing a debt reduction plan, consider a debt consolidation loan, a consumer proposal or, as a last result, a bankruptcy.

If you have any questions or need assistance in calculating your debt ratio or finding ways to reduce your debt, feel free to contact one of Jean Fortin’s personal finance advisors. It’s free, confidential, and without obligations.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee