In Canada, there are many different kinds of debt consumers can have; some good, some bad. Unfortunately, debt issues are something that many of us will one day have to deal with, as we go through life, using our credit cards, buying cars, and securing mortgages.
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As we just mentioned, not all debt is bad. A bit of household and consumer debt can actually be a positive thing for your credit history, report and score, if managed properly of course. But, it’s no secret that debt problems can arise. Situations happen that are simply out of our control. Even just trying to pay for basic necessities can be an issue when financial emergencies fall into our laps. So, for any borrowers out there currently having trouble tackling their debt, don’t panic, there are solutions. Not all of them are convenient or easy, but if you work hard and stay motivated, you’ll find a way.
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In the article below, we’ll talk about some of the most common types of debt that people experience across Canada and all over the world for that matter. We’ll also discuss a few of the solutions available to you. Once you’ve read this, you can start to think about which one might be right for you.
For some more information about good debt vs. bad debt, check out our other article.
Unsecured Debt
This kind of debt is called “unsecured” because it doesn’t demand any assets that can be used as collateral in the event of a borrower defaulting on their payments. Actually, unsecured debt is also commonly referred to as “consumer debt,” because it involves the consumption of goods and services that generally aren’t going to appreciate in value, as say, a house might. Some of the more common types of unsecured debt include, but aren’t limited to:
Unsecured Credit Cards
We’ll begin with one of the most common types of debt. Actually, it’s likely to be one of the first kinds of debt any Canadian will have. While the legal age to sign up for a credit card is 18, it’s not uncommon for parents to give their teenage children prepaid credit cards as gifts, or simply to introduce them to the idea of credit itself. Many borrowers even have multiple credit cards, each one offering a different slew of benefits. Some are free, some have annual fees, some give rewards points, others give small increments of money back at the end of the year.
If you need to consolidate your credit card debt, read this.
It’s pretty rare these days for someone to get by without a single credit card and that’s not necessarily a bad thing. In fact, managing a credit card responsibly is one of the first steps any consumer can take towards building a healthy credit score. As long as you pay your monthly balance off on time and in full, you should start to develop a strong credit score and a healthy credit history.
Then again, credit card debt can certainly get out of hand, when a consumer gets into a cycle of revolving debt. After all, it can definitely be tempting to simply keep up with the minimum monthly payments, instead of paying off the balance in full.
For everything you need to know about your credit score, click here.
Lines of Credit
A line of credit is a temporary loan for a predetermined amount, most often granted to borrowers with good credit, by banks and other financial institutions. Most banks can provide their clients with lines of credit up to around $50,000. In this case, the borrower can tap into the fund as needed, only paying interest on the money that they withdraw, and making affordable minimum monthly payments as needed. Lines of credit are frequently used for financial emergencies, or to fund a large purchase when a borrower’s bank account balance doesn’t necessarily support it, such as home renovations or paying off high-interest debt.
It’s good to know here, however, that lines of credit can be secured and unsecured. Generally, an unsecured line of credit will have a higher interest rate, because it doesn’t involve collateral, as a secured line of credit would.
Personal and Business Loans
Like a line of credit, a personal or business loan can be applied for in order to finance anything that borrower might need. That expense can be a vacation, a car, or home repair that demands attention, or in the case of a business loan, to finance a borrower’s company. Where a personal or business loan differs from a line of credit is that a set amount of money will be given to the borrower, who will be expected to pay it back in monthly installments. The better the borrower’s credit score is, the better their interest rate will be.
Secured Debt
This kind of debt is called “secured” because a borrower needs to offer something up as collateral in order to secure the loan or credit product they’re applying for. Secured debt is more often needed to finance much larger, more expensive purchases than the average borrower can afford within a short timeframe. The collateral involved can be a small security deposit, all the way to something as large as a house, anything that a lender can legally seize to recover the money that they are owed, should a borrower ever default on their loan. However, secured debt cannot be included in a bankruptcy claim or a consumer proposal. Some common types of secured credit include, but aren’t limited to:
Mortgages
A mortgage is one of the most common examples of secured credit. Here, the potential homeowner applies for a mortgage in order to finance a home they’re looking to buy. Like any kind of loan, the borrower will pay off their home in monthly installments, including interest, the rate of which is to be discussed with the lender. The most important thing to know here is that because the mortgage is secured, the house is the asset that will be used as collateral. In other words, if a borrower goes into default, their lender might be forced to take away their house and sell it to recuperate their loss. This is known as “foreclosure.”
Secured Car Loans
While car loans can also be unsecured, secured ones tend to be more common. The same as with a mortgage, a borrower can get a loan from their chosen lender, wherein they’ll finance the car they’ve purchased in monthly payments. And, if they fail to keep up with those payments, their car will be seized.
Need a car, but have bad credit? Read this before you make any decisions.
Secured Credit Cards
A secured credit card is an option that borrowers with low credit scores or little to no credit histories can use for their consumer needs. Unlike an unsecured credit card, this kind of card will, of course, require a security deposit before you can start using it. The user will have a pre-determined credit limit on the card (often equal to their security deposit, but not always), and can make changes to it, then pay the bills as needed, all with a lower interest rate than a normal unsecured credit card. Once they decide to cancel their secured card, as long as their full debt is paid, their security deposit will be refunded. When a borrower uses a secured credit card responsibly for long enough, they can boost their credit score and apply for an unsecured card, if they want.
Ways You Can Deal With Your Debt
If you’re having trouble managing your debt, whether it’s secured or unsecured, from a credit card or a mortgage, sit down, relax and know that there are ways that you can deal with it. In fact, debt problems have become a relatively natural thing all over Canada. While it’s true that not all debt is bad, too much of any kind of debt can certainly be overwhelming, and it can be hard to set your mind on one solution when all you can think about is how much money you owe. As we said in our introduction, not all of these options are simple or convenient, but they’re likely going to be better than being stuck in debt for the rest of your life.
Debt Consolidation Loan
One of the first things you can try is to request a debt consolidation loan from your bank or credit union. When it comes to this kind of loan, borrowers with higher credit scores will have an easier time securing one. Your lender will likely require some type of collateral, just like a secured debt. The more valuable the assets you have to offer up, the higher the loan you’ll be able to secure. If you have no assets for collateral, your chances of approval will be based on your on other factors, for example, your credit history and your ability to repay the loan. However, If you manage to secure a debt consolidation loan, you’ll know exactly when all your debts will be paid in full and you will typically have a lower more manageable rate.
Debt Management Program
Entering into a debt management program means that you’ll hire a credit counsellor and work side-by-side with them to eliminate all your debts at once. The credit counsellor should be able to contact all your lenders and creditors and negotiate payment terms on your behalf. Your debts will then be grouped into one single debt, which you’ll pay through the debt counsellor instead, at a fixed monthly rate. The only problem with a DMP is that it is not a legally binding contract, so some of your lenders may not accept it. However, if it is a possibility, entering a debt management program will likely be less difficult and time-consuming than the following two options.
Consumer Proposal
One of the main areas where a consumer proposal differs from a debt management program is that is a legally binding process, where you’ll work with a licensed insolvency trustee to deal with your debt. For the proposal to be accepted, more than half your lenders need to agree to participate. Once the proposal has started, any debts covered by it will be frozen, wherein you will pay them off through the trustee, over a maximum of 5 years. During that time, your creditors will be forced to cease their actions against you and you’ll only need to deal with your hired insolvency trustee.
Bankruptcy
Bankruptcy should be reserved for the most drastic of debt cases because while it might help you get out of debt, for the time being, it will damage your credit for up to 7 years. There are a number of situations that cause bankruptcy, and if you are considering it, you need to make sure you have no other choice. Like a consumer proposal, you’ll work with an insolvency trustee, who will help you file a bankruptcy claim. All your creditors will then be contacted, any actions against you (wage garnishment, lawsuits, etc.) will cease, and your debts will be frozen. A notice of bankruptcy will then appear on your credit report for up to 7 years, and you will have to rebuild your credit from scratch.
If You Think You Might Be in Danger of Debt Problems, Don’t Wait!
Like we said, debt problems happen. It can be difficult to manage your money and your debt all at the same time. However, the best thing you can possibly do, if and when you feel like you’re at risk of going into serious debt is to be proactive. Do not wait until the situation worsens, because buckling down and draining your bank account will certainly be less disheartening than being forced to file for bankruptcy.
If your bills are too high, always try and at least meet the minimum payment deadline. Cut down on expenses and save money however you can, and if you’re already in debt, contact your lenders immediately and try to negotiate a more reasonable payment schedule. Any good lender will, first and foremost, want to be paid back what they lent you, no matter how long it takes, so if you need to stretch out your payments over a few more years, so be it, if it means avoiding bankruptcy.
And, if you ever do need help with your debt problems, remember, Loans Canada is there for you. With a little bit of time, sweat and elbow grease, we’ll help you get your debts settled, and get you back on the road towards a healthy financial future.
