There’s been a lot of attention in the media about the high level of consumer debt Canadians are indulging in compared to their disposable income.
Easy access to inexpensive credit and little stigma attached to being in debt, as well as the pressure felt to keep up with society’s image of success makes overconsumption a growing problem when people spend a lot more than they are earning.
Nevertheless, while this is true for many, the fact is it is difficult to pass through adulthood without being in some form of debt at some point.
Here are 5 types of debt most people come across at some time in their lives:
1. Car Loan
You could save a lot of money if you bought a car with cash. However, very few people can. Car loans are the traditional way to finance a vehicle, and car dealerships offer cash discounts and financing deals to entice new car buyers.
Long-term car loans (up to 84 months) are becoming more and more popular.
Don’t be taken in by the low interest rate offered and the low payments (often stated as weekly or bi-weekly). Check the financing document to see exactly how much you are paying.
While a car loan has an asset attached to it, that asset is depreciating.
2. Credit Cards
Credit cards are a necessary part of how our world functions today and people use them for a variety of reasons. They provide a certain amount of convenience and can be a beneficial financial tool when used properly.
Where most people’s financial problems begin is when they acquire purchases that they can’t cover by the due date. If you can’t pay off credit card balances monthly, it means you don’t have the money for the purchases you’ve made. Period.
The quickest way to get out of existing credit card debt is to stop creating new debt.
3. Mortgage Debt
There are very few people who can buy a house without taking out a mortgage. You may be approved for a mortgage amount that’s way more than you had anticipated. It’s great that you have a good down payment, but don’t start looking in those high-end neighbourhoods yet. Never pay more than you should just because someone says you can afford it.
Keep your mortgage debt reasonable. Think about how long you will be making payments on your mortgage – it could be up to twenty-five years. What could you be using that money for instead during all that time?
4. Student Loans
About 60% of students take on some student loan debt – it may be difficult to pay for your education without it.
The average student who borrows money expects to graduate with about $27,000 in debt according to a 2015 survey by the Canadian University Survey Consortium.
If you are earning a diploma on borrowed funds, make sure the degree you’re getting has a good chance of providing you with a salary that’s big enough to repay your loan.
A few years in university can drag down your finances for a decade. That burden can often delay major life events such as getting married and buying a house, or even taking a vacation.
5. Wedding debt
Weddings have started to involve bigger numbers as expenses continue to add up.
According to “weddingbells,” the total expected average cost of a wedding is $30,717 (in 2015), including engagement ring and honeymoon, and 75% of brides agree that they will likely spend more than they anticipated.
I’m not suggesting you forego the wedding of your dreams, but that is some serious money for a one-time event.
Final thoughts
You hear all the time that some debt such as mortgages and student loans are “good” debt. There may be times throughout your life when it may be hard to avoid incurring some debt in order to make progress on your financial plans and attain your goals, but that doesn’t make it good. It’s still debt, and your objective should always be to have as little debt as possible.
Falsely terming something as “good” makes people too comfortable with thinking that debt is somehow okay.
Keep debt to a minimum, and always have a plan to pay it off as quickly as possible. The best debts are the ones you don’t owe anymore.
