What is Debt? A Detailed Look

Few of us have ever stopped to really ask “what is debt?” We think it is natural to go through life signing up for multiple credit cards, taking on a large mortgage, a car loan, or a line of credit to finance our needs and wants. However, debt has a way of sneaking up on us if we don’t fully understand what it means to be in debt.

So, what is debt? The definition of debt is

any amount of money owed to a person or organization for funds that you have borrowed

Your total debt includes all of the money you have borrowed from a variety of sources – including some you may not have even considered. Here are some of the most common forms of debt in Ontario:

Credit Cards Bank Loans
Mortgages Lines of Credit
Car Loans Payday Loans
Student Loans RRSP Loans
Taxes Owed Loans from Family and Friends

When you take on any form of debt, it also implies that you intend to pay back the amount you owe according to the repayment terms of the loan. Unfortunately, this is where many of us make mistakes and spiral into debt problems.

Four Types of Debt

To understand more about the kind of debt you currently hold, and what kind of debts you may take on in the future, you should be able to identify the different types of debt. These include:

1. Secured Debts

Secured debts typically begin with the purchase of an asset like a home or vehicle. Your debt in these cases is secured an agreement with your creditor. The agreement enables the creditor to repossess your asset if you default on your payments, or break the terms of your agreement.

2. Unsecured Debts

An unsecured debt may include monthly utility bills, medical fees, payday loans, personal bank loans and credit card debt. This type of debt typically charges a higher interest rate because they are not secured by an asset.

3. Government Debts

You may owe the government money in the form of income taxes or HST. In cases of bankruptcy these are treated in the same manner as unsecured debts.

4. Debts With Co-Signers

Some forms of debt require a guarantor or co-signer upon signing up. If you cannot make the payments required or if you declare bankruptcy, your co-signer will be required to repay your debt.

Good Debt vs. Bad Debt

Often we consider some types of debt to be “good debt”. We think mortgages, student loans, or car loans are good reasons to get into debt. We tell ourselves that real estate is a good investment. With a higher education, you can get a higher compensating job. And you need the car to get to and from work.

However these same debts can be bad. Perhaps you finance a new car to get to a higher paying job, but job that is over an hour away. In a few months, you may realize that the majority of your pay cheque is going toward your car and car-related expenses. Fast forward a few months, and may discover that the job that paid less, may have saved you more. The compensation was lower, but you could have walked to work from home. That means more money would have been freed up for living expenses, bills, and entertainment.

Before you take on any kind of debt, it is important to understand that you are limiting your freedom. Make sure you can truly afford those car payments, mortgage payments or other loan payments before you commit. Debt often comes with years of repayment, so make sure you do the calculations.

It’s essential to stop and really consider “What is debt?”. Figure out the impact that taking on additional debt will have on your daily life. Not just now, but in the long-run.

If you find yourself in a situation where you feel you can no longer handle your debts on your own, contact our professional debt management team at Hoyes Michalos. We can help you determine which debt repayment option is best for you.

Similar Posts:

  1. Debts You Can and Cannot Include in a Consumer Proposal
  2. Secured Creditors
  3. Repaying Student Line of Credit versus Student Loans
  4. Consumer Proposal vs Debt Consolidation
  5. How to Get Debt Consolidation with Bad Credit

Get A Personalized Debt Free Plan

Find an Office Near You

Offices throughout Toronto and Ontario