20/09/2017 0 Comments
How to Handle Different Types of Debt
If you face surmounting debt, you are certainly not alone in your predicament. Finding a way to overcome your debt is a challenge many people continue to struggle with.
If owing money has become your reality for the first time, it will understandably feel overwhelming and stressful to know you have outstanding payments to your creditors. However it is important to recognize that your situation is not hopeless. From credit counselling to consumer proposals in Edmonton and more, there are various debt solutions available to help you manage it.
Types of Debt – Secured Vs. Unsecured
With secured debt, there is collateral incentive to help you pay off the money owed. This said collateral is also why you have the debt in the first place, such as in the case of a car/car loan or a home/mortgage. Unsecured debt on the other hand, means there is no collateral—you simply owe what you owe, such as in the case of credit cards or personal loans from the bank or another lender.
Debt Payment Terms – Fixed Vs. Variable
Fixed payment terms require that loan amounts be paid in fixed amounts by certain dates, such as in the case of a mortgage. By contrast, variable payment means there is no set date to make full payment, such as on credit cards, where the amount owing continues to accumulate until it is paid in full.
Debt Interest Rates – Fixed Vs. Variable
A fixed interest rate means you will consistently pay the same amount of interest on the money you owe for the term of the loan (e.g., a fixed rate mortgage). However, a variable interest rate means that the rate you pay will fluctuate with changing interest rates.
Deductible & Non-Deductible Loans
Most loans are not tax deductible but a few loans are tax deductible. For example, you may be eligible for a student loan tax credit if your student loan qualifies.
Mortgage interest in Canada is not tax deductible unless the mortgage is incurred for business purposes (e.g., you carry on a business from your home or you purchase an investment property for rental income). Car expenses are similarly not deductible unless they are incurred for business purposes.
Loans such as credit cards and personal loans are not tax deductible.
Handling Specific Debts
There are many different types of debt including credit cards, mortgages and student loans. Each type of debt may be handled differently.
1. Credit Card Debt
Credit card debt can be significant as interest rates are often high, so it is best to aim to restrict your credit card spending to only necessary purchases, and limit the amounts to what you know you can afford to pay back quickly. Striving to pay off your highest interest credit cards first is always a wise choice since these cards will otherwise accumulate extra debt on top of what you spent on your purchase(s).
Dealing with your creditors directly may also help to resolve some problems if you are facing them; explain the reasons you cannot pay everything back right now and how much is affordable instead. You may also be able to secure a lower interest rate. If your credit card company agrees to make any changes, make sure the changes are documented.
2. Mortgage Debt
Although mortgages are common among home owners, they remain a recognized form of debt because they involve owing money.
If you own as least a quarter of your home’s equity, you should ensure that you are no longer paying for private mortgage insurance that was likely added when the mortgage began.
You may find some relief from mortgage debt by trying to extend the length of the mortgage, which lowers the payment each month and makes it more manageable in turn. Refinancing may also be a helpful way to manage your mortgage debt, particularly if you have a newer mortgage where you are typically paying the interest rather than the principal.
3. Student Loan Debt
Many people today incur student loan debt which can take until long after completing their studies to pay off. Working to save up money, earning a scholarship or grant, income-based repayment (which adjusts your payments if they equate to a large amount of the income you earn), and cooperative study programs can all help with the financial building of schooling.
Furthermore, you might research volunteer options with a positive social impact, which can raise money to help relieve your student loan debt.
Dealing with Debt Generally
In the past, you may have accepted that interest charges will apply and aim to pay the total amount when possible. At other times, you might proactively pre-pay amounts to lower your payments before they are due. Either way, it is important to stay organized.
It is important to be aware of the amounts you owe including the interest you are accumulating until you pay off your debts in full. It is also critical to create a realistic timeline of how long it will take to pay off your loans so you can budget around them. Making payments as soon as you receive your pay from work is arguably a best practice.
Contact Fox-Miles & Associates Inc. Licensed Insolvency Trustee For Debt Solutions in Edmonton
A consumer proposal in Edmonton is just one of the many debt options available to you and it is often the preferred solution over declaring personal bankruptcy. A licensed insolvency trustee (“LIT”) can explain the many debt solutions available to help you overcome your debts in hopefully short-term.
Contact us at Fox-Miles & Associates Inc. Licensed Insolvency Trustee to arrange your free consultation.