Debt – Use it but don’t Abuse it!
Canadians are falling deeper and deeper in debt with the average Canadian owing over $20,800 in non-mortgage debt but is all debt bad? The expert consensus is that debt that increases your Net Worth is good debt or at least better debt than some other types of debt. Debt that finances things such as the purchase of a home, education, investments, home improvements, RRSP contributions and buying investment properties is generally considered good debt.
Bad debt is everything that decreases your net worth like consumer debt – credit card debt, lines of credit used to purchase consumer products. The truth of the matter is…. If you are buying anything on credit that you’re not paying off at the end of the month, you really can’t afford it. It doesn’t matter how much you think you need it, credit is not a way to extend your disposable income.
Lines of credit, which have much lower interest rates than credit cards (3-4% in the lower end compared with about 12 -29% for credit cards), can become bad debt since people are more likely to carry a balance on them. Instalment loans, which have a fixed payment term, are a way to avoid the temptation offered by lines of credit and credit cards but only if you have the income to make the payments on time.
Securing a home owner’s line of credit can get you a low rate and is one of the cheapest ways to borrow money but should be used delicately. If you find you are plunging into your home equity more than once – that’s a problem. Payday loans and overdrafts on your bank account which carry a substantial interest rate of 21%+ (plus fees), and are some of the most expensive types of debt and should be avoided entirely.
Car loans can be considered good debt but remember a car is a depreciating asset, unlike a house. Most people cannot afford to buy their car outright so if you need to finance your vehicle, ensure you get a reasonable interest rate and pay the loan off within three to four years. Any longer than that and your reasonably good debt will turn sour in a hurry. Also, make sure you factor in the full, long-term cost of borrowing which includes such costs as financing and also insurance, gas, and future repairs.
If you’re going to take on debt, what you want is for it to actually be helping you achieve something or increase your Net Worth as opposed to something that’s just going to depreciate and drive you into bankruptcy. So if you are going to use debt, what you want to be doing is use it to get ahead, not just get by. If you find yourself in more debt than you can handle, call a bankruptcy trustee for a free consultation. Remember to use your debt but don’t abuse it!