How payment plans make debt more palatable.

Anna knew she wanted to lose weight. And there was a surgery that would get it done. The problem was the 49-year-old Hamilton teacher didn’t have the cash to pay for gastric lap band surgery. The procedure at a Toronto clinic five years ago cost $18,000 but by the time she’s finished paying – she still has a few months to go – her bill will have grown to $26,000, swollen with finance charges tacked on by the company loaning her the money for the procedure.

“We were all desperate to lose the weight, so we were willing to pay the $26,000,” says Anna (not her real name), about a group of patients at the clinic who used financing. The company that performed the procedure went out of business so she has none of the included aftercare, adding to her costs.

Despite the issue with the clinic, she still thinks it makes sense “to borrow for something like this,” but she wasn’t counting on finance charges.

Her type of debt, which rating company Equifax Canada calls an instalment loan, is the fastest growing segment of the market. In the third quarter of 2014, instalment loans ballooned by 7.2% from a year ago to $134 billion.

We can’t blame instalment loans for our record household debt, which reached 163.6% of disposable income in the first quarter of this year, according to Statistics Canada. But the ability to finance anything and everything is adding to a total debt bill that Equifax says reached $1.53 trillion at the end of the third quarter of 2014 once you add in credit card debt, lines of credit and mortgages.

There is almost nothing you cannot finance anymore. Houses used to be the only thing we would amortize over a long period, but seven-year loans for cars are now the norm. Furniture, funerals, pet care, recreational vehicles and a laundry list of cosmetic surgery, from skin to teeth, will all find a financial backer if your credit is good enough.

“[You see financing] on any longterm procedures that are off the normal dental plan,” says Dr. George Christodoulou, general partner with Altima Dental. “You’ ll see people [finance] orthodontics, crown and bridge [work] and implants. Most cosmetic stuff is not covered by insurance.”

Some dentists even provide the credit themselves, for patients who don’t have insurance coverage for costly procedures that their plans might deem cosmetic. You can walk into clinics and find brochures offering great rates on procedures like veneers, which can cost $40,000 to outfit your entire mouth.

The default rates on instalment loans remain low, so financial in- stitutions continue to fund them. Consumers love them because the loans come with record low interest rates – but a payment schedule that will keep that debt on your books for years, or even decades. Everything becomes affordable on a monthly basis.

“You don’t have to pay for anything,” says Ron Cirotto, a Burlington, Ont.-based professional engineer who runs amortization.com, which gives people information on calculating mortgage payments. “Go into any store and you can usually get financing. They’re banking on you not paying, so they can charge you fees and interest. You just get hosed over time.

“If the market changes and interest rates go up, there are people who are going to be under water quickly with houses, cars, furniture.”

It’s not just the consumer. Even governments have gotten into the act, issuing debt that doesn’t mature for up to 50 years in some cases.

“The average maturity of Canada’s debt is not out of line with other AAA countries. It has lengthened slightly in recent years,” says Charles Seville, head of North American Sovereigns, with Fitch Ratings. “Longer average maturity shields a borrower from rising interest rates, but borrowing longer term usually carries a higher interest rate.”

Regina Malina, senior director, decision insights, Equifax Canada, says Canadian consumers are slowing their use of credit cards, realizing that carrying debt at rates as high as almost 25% doesn’t make sense. But it’s one of the reasons consumers have turned to instalment loans, which can usually be negotiated from 200 to 300 basis points above the current prime rate of 2.85%. A loan for 4.85% to 5.85% trumps one for 25%.

“Instalment loans have become one of the drivers of our debt,” says Ms. Malina, noting they run anywhere from $5,000 to $100,000. The delinquency rate on those loans is still less than 1%.

“The rates are fairly decent, so it is a good option [for consumers],” says Ms. Malina. “When unemployment is low, interests are low and there is hope [rates] won’t go up, it gives consumers confidence. It’s obvious [stretching amortization] has made it more attractive.”

You want a new boat for $50,000? Why not? Financing for a loan, that will even cover the HST, is readily available at about 5%, meaning monthly payments of just $371. The catch? It’ll take you 20 years to pay back.

Will Walker, president of Collingwood, Ont.-based Walker Financial says boats, recreational vehicles and snowmobiles are all part of the mix. “We are rebranding ourselves under toyloan.com,” says Mr. Walker, an obvious reflection of a growing market for loans for recreational vehicles driven by cheap money.

He says people will struggle to make payments no matter what. “People work hard and you might think the toy is the first thing to go, but they fight for their toys,” he says.

He’s funded by the banks, but says he essentially runs a loan factory with terms and conditions that might be slightly worse than bank. Rules have tightened since the financial crisis – you can’t borrow against a boat older than 10 years – but loans for 135% of the value of a boat can be found. That extra 35 percentage points could buy you some extras for the boat or insurance coverage.

“One of the important things about proper boat financing is all the loans are wide open,” says Mr. Walker, adding that means they can be paid off at any time.

The only collateral you need to put up is the boat itself. Mr. Walker says the banks demand that no more than 40% of your income go towards serving your total debt before you can borrow for his types of toys.

“I found an old document recently from when we started our company back in 1994. Prime was 9.75% and we were writing boat loans at 14%,” says Mr. Walker. That $56,500 boat with HST that cost you $371 a month to cover would jump to $686 per month, if rates rose that high.

The difference today is everybody is “nickeled and dimed to death,” and the only way they can afford anything is to finance their purchase, says Ann Kaplan, president and chief executive of iFinance Canada, which has brands that will finance most anything in small consumer lending.

Ms. Kaplan’s companies will finance up to 72 months for most of its consumer loans, which start at 7.95% for unsecured loans. “We’re cheaper than a credit card but a person should go where it’s cheaper to do their financing,” she says, for instance, maybe a line of credit.

Laurie Campbell, executive director of Credit Canada, says people are borrowing to finance things that are just too expensive to pay for upfront. “Thank God, the credit card message got through, but instalment loans are growing, not just because of credit card costs. It is because instalment loans are being offered by banks,” says Ms. Campbell.

“It’s cheap interest, long amortization and the fact we tell them not to get into credit card debt. They just found another form of debt.”