{"id":531,"date":"2023-09-03T18:55:36","date_gmt":"2023-09-03T22:55:36","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/?post_type=chapter&p=531"},"modified":"2024-11-28T17:20:55","modified_gmt":"2024-11-28T22:20:55","slug":"types-of-debt","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/chapter\/types-of-debt\/","title":{"raw":"Types of Debt","rendered":"Types of Debt"},"content":{"raw":"Many Canadians have some type of debt that is a constant stressor in their lives.\u00a0 As many Canadians seek home ownership, mortgages are usually one of the largest debts for households.\u00a0 Before starting to formulate a plan to live debt-free as a trade worker, it\u2019s important to understand the various common types of debt and how expensive it can be to borrow funds.\r\n\r\n \r\n\r\nSecured Debt vs. Unsecured Debt<\/em>\r\n\r\nSecured debt refers to any debt that is backed by some form of collateral.\u00a0 One of the most common forms of secured debt would be automobile financing.\u00a0 The physical vehicle acts as the collateral to the auto loan.\u00a0 If the borrower were to default on payments, then the vehicle can be seized and forfeited.\r\n\r\nUnsecured debt refers to loans that lenders do not require to be backed by collateral or an asset.\u00a0 It is critical for lenders to assess an individual\u2019s credit history and financial situation in approval of this type, as there is no asset used as collateral in case the borrower is not able to make payments.\u00a0 Credit cards and student loans are common examples of unsecured debt.\u00a0 If one does not have sufficient funds to pay the credit card balance in a timely manner, then individuals will face penalties and interest charges from the credit card companies.\u00a0 There is no asset acting as collateral that an individual can relinquish to the credit card companies.\r\n\r\n \r\n\r\nGood Debt vs. Bad Debt<\/em>\r\n\r\nResources tend to classify and discuss debt as being \u2018good\u2019 or \u2018bad\u2019.\u00a0 Generally, debt that drains an individual\u2019s financial situation is considered \u2018bad\u2019.\u00a0 Examples of \u2018bad\u2019 debts include credit card or auto loans, which have high fees to borrow or the asset depreciates in value over time.\u00a0 \u2018Good\u2019 debt is considered loans with very low interest rates or debts that one can leverage to increase their future income and net asset basis.\u00a0 Student loans tend to have zero interest over the duration of the education period, and will allow trade apprentices to complete qualification to earn higher income amounts as an apprentice progresses in the trade certification process.\u00a0 A small business loan allows one to secure capital to assist in growing a business that will have higher value in the future.\r\n\r\n \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Typical \u2018Good\u2019 Debt<\/td>\r\nTypical \u2018Bad\u2019 Debt<\/td>\r\n<\/tr>\r\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Mortgage within financial means<\/td>\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Credit cards<\/td>\r\n<\/tr>\r\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Student loans<\/td>\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Payday loans<\/td>\r\n<\/tr>\r\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Small business loans<\/td>\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Personal line of credit<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Automobile loans<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOverall, taking on any debt that is beyond your financial means or will not increase your net worth is not recommended.\u00a0 Even loans that may be considered \u2018good\u2019, can lose its value if there\u2019s a crash in the market or there is no work available in the economy when one graduates with student loan debt.\u00a0 Living debt-free allows one to focus more on saving for the future, building upon an asset base, and taking advantage of compounding returns.\u00a0 Trade apprentices have a significant advantage in the pathway towards trade qualification, as one gets to earn as they learn.\u00a0 This increases the chances that one is not in significant debt when completing any trades program.\r\n\r\n \r\n\r\nPersonal Lines of Credit<\/em>\r\n
    \r\n \t
  • Personal lines of credits allow borrowers to have a revolving credit amount with a financial institution. Individuals can borrow funds up to a pre-determined amount, and utilize the funds however they want.\u00a0 Usually the interest rates on personal lines of credits are very high, as they have great flexibility.<\/li>\r\n<\/ul>\r\n\u00a0<\/em>\r\n\r\nCredit Cards<\/em>\r\n\r\nCredit cards allow individuals to purchase items up to a pre-set limit.\u00a0 A monthly statement is provided in which the borrower must meet a minimum payment amount.\u00a0 If the monthly purchases are not repaid in full within the monthly statement date, then a fixed interest rate is applied to the remaining balance owing usually compounded on a daily basis.\u00a0 Credit cards usually have a high annual percentage rate.\u00a0 With daily compounding of interest, fees accrue very quickly the interest on interest amount.\r\n\r\n \r\n\r\nPayday Loans<\/em>\r\n\r\nPayday loans are typically very short-term loans with very high fees.\u00a0 It is called a payday loan as a borrower needs to pay back the loan with the next paycheck.\u00a0 The fees on payday loans are extremely high, such that each provincial or territorial government limits the fees charged on a pay day loan.\u00a0 Payday loans are different than traditional loans in that it is for a short period of time (only few weeks), one can usually qualify without a credit check, the borrower pays a flat fee instead of interest if were to pay on time full amount, and the lender organizes the pay back based on payroll schedule.\u00a0 Overall, pay day loans are a very costly method of borrowing and should only be utilized when all other measures are exhausted for a very short-time frame.","rendered":"

    Many Canadians have some type of debt that is a constant stressor in their lives.\u00a0 As many Canadians seek home ownership, mortgages are usually one of the largest debts for households.\u00a0 Before starting to formulate a plan to live debt-free as a trade worker, it\u2019s important to understand the various common types of debt and how expensive it can be to borrow funds.<\/p>\n

     <\/p>\n

    Secured Debt vs. Unsecured Debt<\/em><\/p>\n

    Secured debt refers to any debt that is backed by some form of collateral.\u00a0 One of the most common forms of secured debt would be automobile financing.\u00a0 The physical vehicle acts as the collateral to the auto loan.\u00a0 If the borrower were to default on payments, then the vehicle can be seized and forfeited.<\/p>\n

    Unsecured debt refers to loans that lenders do not require to be backed by collateral or an asset.\u00a0 It is critical for lenders to assess an individual\u2019s credit history and financial situation in approval of this type, as there is no asset used as collateral in case the borrower is not able to make payments.\u00a0 Credit cards and student loans are common examples of unsecured debt.\u00a0 If one does not have sufficient funds to pay the credit card balance in a timely manner, then individuals will face penalties and interest charges from the credit card companies.\u00a0 There is no asset acting as collateral that an individual can relinquish to the credit card companies.<\/p>\n

     <\/p>\n

    Good Debt vs. Bad Debt<\/em><\/p>\n

    Resources tend to classify and discuss debt as being \u2018good\u2019 or \u2018bad\u2019.\u00a0 Generally, debt that drains an individual\u2019s financial situation is considered \u2018bad\u2019.\u00a0 Examples of \u2018bad\u2019 debts include credit card or auto loans, which have high fees to borrow or the asset depreciates in value over time.\u00a0 \u2018Good\u2019 debt is considered loans with very low interest rates or debts that one can leverage to increase their future income and net asset basis.\u00a0 Student loans tend to have zero interest over the duration of the education period, and will allow trade apprentices to complete qualification to earn higher income amounts as an apprentice progresses in the trade certification process.\u00a0 A small business loan allows one to secure capital to assist in growing a business that will have higher value in the future.<\/p>\n

     <\/p>\n\n\n\n\n\n\n\n
    Typical \u2018Good\u2019 Debt<\/td>\nTypical \u2018Bad\u2019 Debt<\/td>\n<\/tr>\n
    \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Mortgage within financial means<\/td>\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Credit cards<\/td>\n<\/tr>\n
    \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Student loans<\/td>\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Payday loans<\/td>\n<\/tr>\n
    \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Small business loans<\/td>\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Personal line of credit<\/td>\n<\/tr>\n
    <\/td>\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Automobile loans<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Overall, taking on any debt that is beyond your financial means or will not increase your net worth is not recommended.\u00a0 Even loans that may be considered \u2018good\u2019, can lose its value if there\u2019s a crash in the market or there is no work available in the economy when one graduates with student loan debt.\u00a0 Living debt-free allows one to focus more on saving for the future, building upon an asset base, and taking advantage of compounding returns.\u00a0 Trade apprentices have a significant advantage in the pathway towards trade qualification, as one gets to earn as they learn.\u00a0 This increases the chances that one is not in significant debt when completing any trades program.<\/p>\n

     <\/p>\n

    Personal Lines of Credit<\/em><\/p>\n

      \n
    • Personal lines of credits allow borrowers to have a revolving credit amount with a financial institution. Individuals can borrow funds up to a pre-determined amount, and utilize the funds however they want.\u00a0 Usually the interest rates on personal lines of credits are very high, as they have great flexibility.<\/li>\n<\/ul>\n

      \u00a0<\/em><\/p>\n

      Credit Cards<\/em><\/p>\n

      Credit cards allow individuals to purchase items up to a pre-set limit.\u00a0 A monthly statement is provided in which the borrower must meet a minimum payment amount.\u00a0 If the monthly purchases are not repaid in full within the monthly statement date, then a fixed interest rate is applied to the remaining balance owing usually compounded on a daily basis.\u00a0 Credit cards usually have a high annual percentage rate.\u00a0 With daily compounding of interest, fees accrue very quickly the interest on interest amount.<\/p>\n

       <\/p>\n

      Payday Loans<\/em><\/p>\n

      Payday loans are typically very short-term loans with very high fees.\u00a0 It is called a payday loan as a borrower needs to pay back the loan with the next paycheck.\u00a0 The fees on payday loans are extremely high, such that each provincial or territorial government limits the fees charged on a pay day loan.\u00a0 Payday loans are different than traditional loans in that it is for a short period of time (only few weeks), one can usually qualify without a credit check, the borrower pays a flat fee instead of interest if were to pay on time full amount, and the lender organizes the pay back based on payroll schedule.\u00a0 Overall, pay day loans are a very costly method of borrowing and should only be utilized when all other measures are exhausted for a very short-time frame.<\/p>\n","protected":false},"author":1780,"menu_order":1,"template":"","meta":{"pb_show_title":"on","pb_short_title":"Types of Debt","pb_subtitle":"","pb_authors":["anne-lee"],"pb_section_license":"cc-by-nc-nd"},"chapter-type":[48],"contributor":[61],"license":[58],"class_list":["post-531","chapter","type-chapter","status-publish","hentry","chapter-type-standard","contributor-anne-lee","license-cc-by-nc-nd"],"part":159,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapters\/531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/wp\/v2\/users\/1780"}],"version-history":[{"count":3,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapters\/531\/revisions"}],"predecessor-version":[{"id":1390,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapters\/531\/revisions\/1390"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/parts\/159"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapters\/531\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/wp\/v2\/media?parent=531"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/pressbooks\/v2\/chapter-type?post=531"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/wp\/v2\/contributor?post=531"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-json\/wp\/v2\/license?post=531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}