While using credit is nearly unavoidable for most modern consumers, some types of debt run the risk of turning into a major problem. Are you carrying a debt that could be deemed risky? BC Licensed Insolvency Trustee Blair Mantin joined CTV News Vancouver to explain key concerns about different types of debts consumers commonly have, what you should watch out for when it comes to your debt, and what you can do if you find yourself struggling to pay off your debt.
Watch the clip here, and read more below:
Potentially Risky Consumer Debts
Although these two common types of credit can offer a short-term benefit, use caution when taking on these debts, where payments can easily become unmanageable:
Long-Term Vehicle Financing: Many people finance a vehicle, which is not necessarily a problem – but financing terms are now longer than ever. Even though committing to a five, seven, or even eight-year financing term is becoming more common, consider the risks of doing so:
- Making an unaffordable vehicle ‘affordable’ by stretching out payments over a longer term.
- Investing in an asset that will rapidly depreciate (the exact opposite of a mortgage, where your investment is expected to increase in value).
- Extended car payments can take up a big portion of your household income that could be used for savings, retirement, or even paying off other debts.
Credit Card Balances: Your credit has already been used and now you’re committed to the payments – and the worst part about credit card debt – the high interest that accumulates on often long forgotten purchases.
- If you’re not able to pay your balance in full each month it’s easy for credit card debt to add up over time, and this often happens through frequently overspending, sometimes as a direct result of having insufficient income to meet both your household costs AND debt payments.
- The ‘borrow-repay-borrow’ cycle can be almost impossible to break.
- With an interest rate of 24% (a mid-level rate for most bank and department store cards) your debt will double every three years!
- Making only minimum monthly payments (or slightly more than) means even a relatively small balance can take years to pay off. For example, a $6,000 debt could take 40 years+ to pay off making only your minimum monthly payments and you would pay several times more in interest charges than the actual amount that you originally borrowed.
Most Risky Consumer Debts
These types of debts can point to an urgent debt problem, either present – or waiting to reveal itself:
Payday or ‘Fast Cash’ Loans: Payday loans are usually a ‘last resort’ type of debt used to meet daily living expenses in a hurry. Because the borrowing fees and interest charges on payday loans are extremely high, using payday loans or ‘fast cash’ advances creates a major risk of kicking off a borrowing cycle that can be even more difficult than credit cards.
- This type of borrowing often leads to people carrying multiple payday loans. It’s not uncommon for people to become trapped in a cycle of payday loans, to have up to a dozen different loans outstanding at the same time.
Canada Revenue Agency Debts: Whether an unpaid balance for income taxes, business GST, or CERB overpayment – an outstanding government debt is not to be taken lightly.
- The government has powerful collection actions at their disposal, and, unlike many other creditors, Canada Revenue Agency can start collection action virtually overnight. You may not learn of pending action until it is already in place, including wage garnishment/seizure, a bank account freeze, or a lien placed on your property.
If you find yourself unable to repay your government debt, or in a situation where collection action is escalating, talk with a Licensed Insolvency Trustee as soon as possible.
Consumer Debts to Be Cautious Of
There are two additional types of consumer debt to be cautious of, particularly when it comes to trying to manage debt you already have:
Co-Signing Debt: As Licensed Insolvency Trustees we’re regularly asked when it would be advisable to co-sign a debt for someone else – our answer: almost never!
- Co-signed debts are not a 50/50 liability as many people believe – each person on the account is responsible for 100% of the unpaid debt if the other person does not pay.
- Getting a co-signer when you’re already struggling financially often just introduces additional layers of stress and emotional responsibility – you’ve now given that creditor another responsible party to pursue for payment.
- Conversely, if you’re considering co-signing for someone else, understand that you are potentially letting someone else impact your monthly financial commitments and credit rating.
Using Assets as Collateral: Particularly if you are seeking to consolidate debt by borrowing, lenders may require you to pledge to them security over an asset to get a loan.
- Like co-signing, in the event you are unable to meet your repayment terms, your creditor now has additional recourse to collect upon the debt, which could include seizing and forcing the sale of the pledged asset.
- Be especially careful before taking on additional charges against your home equity – you only have so much to borrow against, not to mention potentially leaving yourself vulnerable to an interest rate increase or downturn in the housing market.
Where to Get Debt Help in BC
If you have concerns about any of your debts or are considering what you can do to manage your debt, reach out to a local Licensed Insolvency Trustee in your province. You can safely get confidential support from a qualified and unbiased professional by contacting a Licensed Insolvency Trustee for a free debt consultation.
Sands & Associates’ team of debt help experts work with people across British Columbia and our full suite of debt help services is available in person from local offices around the province, over the phone, or online – whatever is most comfortable and convenient for you.
Your debt-free future IS possible and may be closer than you think. Connect with a caring, non-judgmental Licensed Insolvency Trustee today – book your free, confidential consultation now.