Most people understand the concept of debt, but some do not understand exactly what kind of debt they have. If you do not understand the difference between your debts, this article is for you. Understanding the difference between certain types of debt is a necessity to manage your finances successfully. With this knowledge, you will be able to repay your debts more efficiently and use your credit strategically.
What is a consumer debt?
Primarily, a consumer debt is money owed to a lender or creditor as a result of the purchase of an item, such as clothing and electronics, which is consumable and loses value over time. Unlike a company that uses its debt to finance an investment, the consumer’s debt is used to purchase a good, as for a car. Trailing a lot of consumer debt is not beneficial and can affect your income and reduce your ability to make your regular payments. The worst case scenario is that if your consumer debt is made too heavy, and you are unable to handle it properly, it will lead you directly to bankruptcy. On a better note, a consumer debt is not necessarily a bad thing. For example, you could support this one after buying a car loan that will allow you to travel to a higher paying job.
Secured debts and unsecured debts
The first distinction to make is the difference between a secured debt and an unsecured debt. A secured debt takes its guarantee of repayment in the form of seizure. This is not the case of unsecured debt. Your mortgage or car loan are secured debts; if you do not pay back your lender, he is legally entitled to seize anything that has been used as collateral. In most cases, it would be your car or your house, to cover the debt. A secured debt always involves exchanging something of value that you could lose if you do not make your regular payments.
Unsecured debts do not involve seizure. In this case, your property can not be entered. However, lenders can penalize and threaten you, or even take legal action against you. The only case where your house could be foreclosed is if the lender pursues you successfully. A credit card debt is generally unsecured and that is why credit card companies work with collection agencies.
In general, a credit card is an unsecured type credit, but some credit card companies offer secured credit cards. For example, if you make a deposit of $ 500, you will have a credit limit of $ 500. If you do not make your payments, this $ 500, which acts as collateral, can be seized to cover your debt.
Revolving debt and installment debt
There is also a difference in the way you make your payments each month. In the case of an installment loan debt, you must repay a fixed amount each month. That’s the way your auto loan and your mortgage work, for example. The advantage here is that you know how much to pay back monthly. A revolving debt is a debt that does not require a fixed monthly repayment. So, since you do not spend the same amount every month on your credit card, a credit card debt is considered a revolving debt.
Know where your debts come from
It is important to know the source of your debts. It means how you got to those debts and what lender or creditor holds them. While there are countless ways to approach your debts, we recommend you repay the debt with the highest interest rate first and so on.
You will know where to start by going back to the source of your debts. Some debts have higher interest rates than others. Major credit card companies and banks will generally have lower interest rates than retail credit cards.
Debts that you can or can not consolidate
The majority of your unsecured debt can be included in most types of debt consolidation. There are other specific forms of consolidation such as student loans, where the student loan installment is consolidated with a special consolidation loan. Even though payday loans and fast cash advances are considered unsecured revolving debts, sometimes these contracts come with clauses that prevent you from consolidating them.
you are not alone
Earlier this year, the Globe and Mail reported that Canadians ended 2015 with a record high debt. While low interest rates persist, the real estate market saw the year 2015 with the most household debt ever listed since 2011. The debt-income ratio of Canadian households bristled in the second half of the year. In 2015 and at the end of the year, households had more than $ 1.65 in debt for every dollar of income. While debt is a serious problem in Canada, it is still possible to get back to zero with your debts by developing a repayment plan.
If you currently have consumer debt problems and are looking for light at the end of the tunnel, you have options. We can find you the best solution for your situation in order to better manage your debts and help you in the process of paying off your consumer debt.