In Canada, there are different types of debt that consumers may have; some good and some bad. Unfortunately, debt problems are problems that many of us will face one day, in our lifetime. Whether using our credit cards, buying cars or getting mortgages. As mentioned above, not all debts are bad. A bit of household or consumer debt can actually be a positive thing for your credit history, your credit report or your credit rating, if this is handled correctly of course. On the other hand, problems of indebtedness can occur. Situations simply beyond our control. Even trying to pay for basic necessities can be a problem when financial emergencies fall on us. So, for all borrowers currently having trouble paying their debts, do not panic, there are always solutions. They are not all practical or easy, but if you work hard and stay motivated, you’ll get away with it.
In the article below, we will discuss some of the most common types of debt in Canada and around the world. We will also discuss some of the solutions available to you. Once you have read this, you can think of the solution that will suit you the most.
This type of debt is called “unsecured” because it does not require any property that can be used as collateral in the event of default by the borrower. In fact, unsecured debt is also commonly referred to as “consumer debt” because it involves the consumption of goods and services, which, in general, will not gain in value, as a home would. The most common types of unsecured debt include, but are not limited to:
Unsecured credit cards
This is one of the most common types of debt. In fact, it will probably be one of the first types of debt that Canadians will have. Although the legal age for signing up for a credit card is 18, it is not uncommon for parents to give prepaid credit cards to their children, or simply to introduce the idea of credit. . Many borrowers even have several credit cards, each offering a different range of benefits. Some are free, others have annual fees, give reward points, or offer small increases in money at the end of the year.
It’s pretty rare nowadays for someone to have only one credit card and it’s not necessarily a bad thing. In fact, the responsible management of a credit card is one of the first steps that the consumer can take towards a good credit rating. As long as you pay your monthly balance on time and in full, you should start developing a credit rating and a healthy credit history.
Again, credit card debt can certainly get out of control when a consumer enters a revolving debt cycle. After all, it can certainly be tempting to simply make the minimum monthly payments, instead of paying off the balance in full.
Line of credit
A line of credit is a temporary loan of a predetermined amount, most often given to borrowers with good credit, by banks and other financial institutions. Most banks can offer their clients lines of credit of approximately $ 50,000. In this case, the borrower can tap into the fund as needed, pay only interest on the money he withdraws, and make minimum monthly payments affordable. Lines of credit are frequently used for financial emergencies or to finance a major purchase when the balance of a borrower’s bank account can not support it, such as home renovations or the repayment of high-interest debt. However, it is good to know that lines of credit can be secured and unsecured. Generally, an unsecured line of credit will have a higher interest rate because it does not involve collateral, as would a secured line of credit.
Personal and commercial loans
Just like a line of credit, a personal or business loan can be requested to fund everything a borrower might need. This expense can be for a holiday, a car or a house that requires attention, or in the case of a commercial loan, to finance the company of the borrower. Where the personal or commercial loan differs from a line of credit is that the borrower will receive a sum of money that will be repaid in monthly installments. The higher the credit rating of the borrower, the higher the interest rate will be.
This type of debt is called a “guarantee” because a borrower has to offer something as collateral to secure the loan or credit proceeds he or she requests. Guaranteed debt is more often needed to finance larger, more expensive purchases that the borrower can not afford. The guarantee involved can range from a small security deposit to the home of the borrower. In short, all that the lender can legally seize to recover the money owed to him in case the borrower would be in default of payment on his loan. However, a secured debt can not be included in a bankruptcy claim or a consumer proposal. Some common types of secured credit include, but are not limited to:
A mortgage is one of the most common examples of secured credit. Here, the potential landlord applies for a mortgage to finance a house he is looking to buy. Like any type of loan, the borrower will repay his home in monthly installments, including interest, the rate of which must be discussed with the lender. The most important thing to know here is that since the mortgage is guaranteed, the house is the asset that will be used as collateral. In other words, if a borrower is in default, his lender may be forced to take over the house and sell it to recover his loss. This is a “seizure”.
Guaranteed auto loans
Auto loans can be unsecured, but secured loans are more common. According to the same principle as a mortgage, a borrower can obtain a loan through his chosen lender, with whom he will finance a car purchased and paid in monthly payments. And if he can not make his payments, the car will be seized.
Guaranteed credit cards
A secured credit card is an option that borrowers with bad credit or no credit history can use for their consumer needs. Unlike an unsecured credit card, this type of card, of course, will require a security deposit before you can start using it. The user will have a predetermined credit limit on the card (often equal to the security deposit, but not always) and will be able to use it, then pay bills as needed, all with a lower interest rate than an unsecured card. Once the borrower decides to close his secured credit card, if the debt is fully paid off, the security deposit will be refunded. When a borrower uses a secured credit card responsibly for long enough, their credit rating will increase and they can then apply for an unsecured credit card if they wish.
How to manage your debt
If you have difficulty managing your debt, whether secured or not, from a credit card or mortgage, sit back, relax and know there are ways to settle the problem. In fact, debt problems have become a relatively common occurrence across Canada. While it is true that not all debts are bad, too much debt can become overwhelming, and it can be difficult to find a solution. Especially when all you have in mind is the amount of money you owe. As mentioned above, all of these options are not simple or practical, but they are probably going to be better than being stuck for the rest of your life.
Debt consolidation loan
One of the first things you can try to do is to apply for a debt consolidation loan from your bank or credit union. When it comes to this type of loan, borrowers with a higher credit rating will have an easier time getting a loan. Your lender will likely require some type of collateral, such as for secured debt. The more assets you have, the higher the loan will be. If you do not have collateral, your chances of approval will depend on other factors, such as your credit history and ability to repay a loan. However, if you manage to get a debt consolidation loan, you will know exactly when all your debts will be paid in full and you will also have a lower and more manageable interest rate.
Debt Management Program
Signing up for a debt management program means that you will be hiring a credit counselor and will work together to help you eliminate your debt once and for all. The credit counselor should be able to contact all your lenders and creditors and negotiate the terms of payments on your behalf. Your debts will then be consolidated into one debt, which you will pay through your advisor in one fixed monthly amount. The only problem with such a program is that it is not a binding contract; some of your lenders may not accept it. However, if this is a possibility, enrolling in a debt management program will probably be less difficult and less burdensome than the following 2 options.
The main difference between a consumer proposal and a debt management program is the binding force of these. For the proposal to be accepted, more than half of your lenders must agree to participate. Once the proposal has begun, all debts included therein will be frozen, and you will be refunded through a trustee for up to five years. During this time, your creditors will be forced to stop their actions against you and you will only need to deal with your insolvency trustee.
Bankruptcy should be reserved for the most severe cases of indebtedness, because even if it could help you out, your credit will be damaged for 7 years. There are a number of situations that cause bankruptcy, and if you consider that among your options, you must make sure that you have no other choice. Like the consumer proposal, by declaring bankruptcy, you will work with an insolvency trustee who will help you file the bankruptcy claim. All your creditors will be contacted, any action against you (payroll, lawsuit, etc.) will cease and your debts will be frozen. A bankruptcy notice will then appear in your credit report for a minimum of 7 years, and you will need to rebuild your credit from scratch.