Debt is an everyday fact of life for many. Whether it’s student loans, car loans, or mortgage debt, most of us have experienced it at some point in our life. One of the key things to reduce debt’s hold over you is to understand how it works so you can develop a plan to pay it off over time.
You might have heard the terms good debt and bad debt: in a nutshell, good debt allows you obtain an asset that results in earning more money down the road, while bad debt is simply buying things you cannot afford.
There are various types of debt. Revolving debt includes credit cards and lines of credit which allow you to borrow money up to a limit. Any amounts that have been paid off can be borrowed again. Some debts are secured, like mortgages and car loans. Secured loans mean you can borrow at a lower rate since the lender can seize your asset and sell it to recoup their money if you don’t pay your debts back. Conversely, unsecured loans simply rely on your ability and willingness to pay the loan back, so you pay a higher interest rate for unsecured loans.
Student loans can be obtained through government programs like OSAP, or through the bank. Since most students are young and have little income and credit history, banks rely on parents or other family members to guarantee that they’ll get their money back.
In terms of how much you’ll pay for the opportunity to borrow someone else’s money, financial institutions will charge you an interest rate. This is often quoted in terms of Prime + X%. If the prime rate, set by Canadian banks, goes up, the amount of interest you pay on the loan also goes up. The longer the term of the loan, or the longer you take to pay back a loan without a set term, the more interest you will pay on the borrowed money.
