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Auto loans drive Canadian consumer debt to record highTibor Kolley/The Globe and Mail

Canadian consumer debt hit a record high in the third quarter, driven by loans to purchase new cars.

The average Canadian's non-mortgage debt reached $26,768 in the third quarter, according to a report released Wednesday by TransUnion – the highest per person debt level since the credit bureau began tracking the data in 2004. It's the fastest pace of debt accumulation in nearly two years.

The most recent jump in this measure of debt – which includes credit cards, car loans, instalment loans and lines of credit – is a sharp turnaround from the stagnant growth seen in 2011, when there were indications that consumers were heeding warnings from policy makers and taking steps to curb their borrowing.

Instead, TransUnion said Wednesday that consumer debt in the third quarter increased at its fastest rate since the end of 2010, jumping 4.6 per cent on an annual basis and 2.1 per cent from the previous quarter. The report noted that in the last five years, overall inflation as measured by the consumer price index has risen 9 per cent while non-mortgage debt has soared 37 per cent.

Thomas Higgins, vice-president of analytics at TransUnion, says the debt levels are certainly moving in the wrong direction. "I was not expecting it to rise as much as it did. This is the biggest jump-up we have seen in almost two years. At some point in time, we have to stop spending at a rate more than we are growing our earnings."

While borrowing in the form of lines of credit, credit cards and instalment loans rose or fell slightly in the most recent report, the bulk of the increase in consumer debt came from car loans. Auto borrowing debt climbed 11.25 per cent from a year earlier and 1.84 per cent from the previous quarter, the TransUnion report showed.

Other economic reports also suggest the Canadian love affair with vehicles is flourishing. Retail sales at new car dealers soared 8.1 per cent in August from a year earlier, compared with a 2.7 per cent gain in total spending, according to Statistics Canada's latest monthly figures.

One possible reason, Mr. Higgins said, is that during the recession, Canadians held off getting new cars and paid off their leases, driving auto loans lower. "Now things are better, we are out of the recession, we are not hearing terrible things about the U.S. or Europe people have started thinking that it is time to get a new car."

The problem is that debt in other areas is not going down to compensate, he said. "Today, people can carry this debt, but if we do get a big shock, like higher interest rates or job losses, then we will get hit."

Lines of credit, which make up 40 per cent of Canadian consumer debt and are typically tied to variable interest rates, will be one area where many Canadians are likely to feel the pinch of an interest rate hike, Mr. Higgins said.

Benjamin Tal, the deputy chief economist at Canadian Imperial Bank of Commerce, says car loans amount to only about 20 per cent of all consumer loans and are therefore not a major problem.

"I do not dismiss that we have too much debt, we know that," he said. But he is not as worried about people buying cars the way he would be if they were borrowing wildly on their credit cards or lines of credit.

The good news is that for now, delinquency levels on consumer debt in the TransUnion report remain low, which suggests that people are able to manage their current debt and make their payments on time.

The TransUnion analysis is based on a sample of anonymous credit files of all credit-active Canadians.

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