Area of Law: Credit, Debt and Bankruptcy
Answer # 246
Most common types of debtRegion: Ontario Answer # 246
Debts incurred for investment
While it generally is not considered a good thing to have any debt, some types of debt are considered better choices than others. For example, a debt that is incurred to invest in your future is a usually considered a good financial decision, and better than taking on unnecessary debt to pay for depreciating goods.
Common types of debt that are considered to be an investment include:
Student loans – student loans may be considered good debt because an education is considered an investment in yourself and your future earning potential.
Business loans – investing in your own business is also considered a good debt because the intent is usually to make and grow a successful business and secure a strong financial future.
Mortgages – buying real estate is almost always considered a smart financial investment because the value of real property increases over the long term. Therefore, taking on a mortgage, which generally has a lower interest rate than other debt – such as credit card debt– is considered a good debt.
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Other types of debt
Debts that are not considered good financial decisions are ones that will not contribute financially to your future. In many cases, people incur debt to purchase things that decrease in value, and things that are not necessary.
Credit card debt – one of the most common types of debt is obtained through credit cards. This is often considered the worst kind because it is far too easy to spend and carries the highest interest rate. Credit cards are used most often for daily expenses such as restaurants, entertainment and clothing. Interest rates charged by credit card companies are very high, and are payable when the monthly balance is not paid in full. Many people are only able to pay the minimum required payment each month, often taking years to pay off the debt. As a result, they end up spending considerably more than the original price of the item they bought.
Payday loans or cash advance loans – this type of debt is often the most dangerous, in that it appeals to people who may already be experiencing a lot of debt and are vulnerable. Payday loans promise a short-term loan without asking for a credit check. However, the interest rate is incredibly high. Therefore, once the loan is paid back, with interest, another loan is often needed because the individual does not have enough money left after paying back the first loan.
Gambling debt– debt incurred from gambling and gambling addiction is very serious. Often, the debt translates into credit card and loan debt. People with gambling addictions keep turning back to the gambling to pay off the debt. It becomes a vicious cycle.
Debt owed to CRA – common types of Canada Revenue Agency (CRA) debt include:
- individual and corporate income tax
- GST/HST remittances
- benefit overpayments
- defaulted Canada Student Loans
- Employment Insurance overpayments and penalties
- Canada Pension Plan overpayments
Personal loans – personal loans are most often used to purchase things such as:
- home renovations
- large ticket items such as appliances
Personal loans are attractive for a number of reasons, including:
- they can be used for anything an individual wants,
- they can be obtained relatively quickly,
- they can be for large amounts,
- they have fixed interest rates, fixed length of repayment and fixed monthly payments, and
- the interest rate is almost always lower than a credit card loan.
However, people may also use the money from their personal loan to pay off bills and expenses, such as food or rent, that are required every month. If only the required minimum payment is made each month, it is easy for the debt to grow. The amount of debt you have, and your ability to pay if off, will be reflected in your credit score and credit history, two things lenders look at when deciding whether to issue you credit.
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