Most Canadians are carrying some type of debt, from a mortgage to a student loan to a (or several!) credit card. But what many consumers don’t consider, is that not all types of debt are created equal and it’s important to take stock before taking on the debt.
Sands & Associates Vice-President and Vancouver Licensed Insolvency Trustee Blair Mantin joined Breakfast Television Vancouver to help viewers understand some key differences when it comes to debt-types, and what BC consumers can do if they find themselves in need of debt help.
Watch the Breakfast Television Vancouver clip here, and read more below:
Debt-Types: The good, the bad – and the ugly!
“Good Debt”: Debt that is undertaken with the expectation of a future benefit.
Generally a mortgage would be considered “good beneficial debt” as it’s almost a kind of savings plan:
- Housing is a basic necessity, and with a mortgage (instead of paying rent) the idea is that you’re progressively building equity in your home that will appreciate over time.
Caution: Your mortgage can “turn bad” if you overextend a home equity line of credit, or take on too much mortgage with an interest rate that increases as rates rise.
Taking on a student loan means you’re investing in yourself and your future earning potential:
- Generally government student loans have manageable repayment terms, which, if you’re able to maintain required payments, can keep a student loan on the “good side”.
Caution: It’s easy to take on more student debt than you need. Carefully consider before financially investing in specific programs, and be realistic about your ability to earn an income with the credentials you’ll acquire.
“Bad Debt”: Use caution when taking on – the money (credit) and its benefits may be long gone, but the repayment is still lingering.
Credit Card Balances
Credit card debt can accumulate slowly over time, often as a result of regularly overspending or simply not having enough paycheque to meet your living expenses.
- Making only minimum payments (or just slightly more than that) each month means that even a relatively small amount of debt can take years to pay back.
Caution: With an interest rate of 24% (a mid-level rate for most bank and department store cards) your debt will double every 3 years! A $6,000 debt could take 40 years or more to pay off with only the minimum payments being made each month.
Long Vehicle Finance Terms
The opposite of your mortgage, financing a vehicle means investing in an asset that depreciates – rapidly!
- Taking advantage of financing to get a car isn’t a bad thing, but finance terms are now longer than ever, and tying yourself to a 7 or even 8 year financing term isn’t uncommon.
- Car payments can take up money that would be beneficial towards paying off high interest debt, building savings, or retirement planning.
Caution: Avoid making an unaffordable vehicle “affordable” by stretching out the payments over a longer term. Think carefully before signing on for long-term vehicle payments.
“Ugly Debt”: Debts brought on as a last resort and/or debt that can have a severe impact if it’s not immediately paid.
The borrowing fees and interest rates of payday loans are extremely high, which often starts a cycle of borrowing that is difficult to break. This type of “last resort financing” can also lead to a person having multiple payday loans outstanding at a time.
Caution: Take a close look at why you’re using a payday loan company before making any commitments. If the problem is becoming a habit, then it may be time to speak to a professional debt advisor to get help breaking the cycle.
Whether you owe money for taxes, GST or payroll remittances, or even outstanding medical service premiums, the government is one creditor you don’t want to have.
- The government has powers of collection action and even wage seizure that most other creditors do not.
- If you’re unable to pay the debt or collection has escalated speak with a Licensed Insolvency Trustee as soon as possible, they can help you.
Caution: Avoiding filing an income tax return as a way to keep your outstanding balance from growing is generally a bad idea. Canada Revenue Agency will often issue “arbitrary assessments” with huge balances due as a way to prompt a non-filer into complying and paying.
5 Signs Your Debt Has Become a Problem
- You’re only able to make slightly more than, or not even the minimum monthly payments towards your credit card debt each month.
- Debt payments are taking up a significant amount of your monthly income.
- You have considered or been turned down for a traditional debt consolidation loan.
- Worry, anxiety or fear about money and your debts is becoming a regular occurrence and it is impacting you or your family.
- You’re trying to ignore your debt. Creditors may be threatening to, or have already begun collection calls or other measures.
Filing a Consumer Proposal or personal bankruptcy with the help of a Licensed Insolvency Trustee can allow you to consolidate virtually all consumer and government debt, and cut how much you have to repay.
Meet with a local debt help expert from Sands & Associates to learn about the legal options you have to become debt-free. Book your confidential free debt consultation now.