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How to manage your debt

Here's how to shrink the most common types of debt.

Whether it’s cars, houses, student loans, shopping, travel, supporting a family or starting a business, most of us end up spending more than we have at some point in our lives. We do this by going into debt, which can be a good thing but can also be a prison if we don’t stay on top on our finances.

What is debt and is it bad?

Graphic depicting businessman shackled to a giant coinDebt is anything you owe to someone else. Financially speaking, debt is acquired by borrowing money from a lender – like a bank, credit card provider or private lender – to make a purchase. To repay the debt, you give back the amount you originally borrowed (the principle amount) plus an extra charge that’s usually expressed as a percentage of the original loan amount (the interest rate).

For example, if you borrow $1,000 from your bank at 5.9% interest, you would end up paying back $1,000 plus an interest fee of ($1,000 X 0.059) = $59. The bank would receive a total of $1,059.

You may consider the affordability and necessity of what you want to buy when deciding whether to go into debt. Most people can’t afford to buy a home or car with cash, so many prefer to finance these big-ticket items with a loan. (Although, if you want to avoid interest charges and don’t mind waiting, you may prefer to take out a smaller loan or avoid borrowing altogether by working and saving up your own money.)

While getting into debt can seem scary, there are situations when you might want to take out a loan.

Good debt

Check mark in green-filled circle

If you borrow money for something that will increase in value, it’s considered a “good” debt. Good debts tend to come with low to moderate interest rates and will provide you with a return on your money. Examples include:

Bad debt

X in red-filled circle

On the other hand, debt used to purchase something that will hold or decline in value is considered “bad” debt. Bad debts often come with high interest rates and don’t increase your net worth. These include:

Whether a debt is “good” or “bad” is based on what the funds will be used for. For instance, a personal loan could be considered “good debt” if used to finance a business or “bad debt” if used to buy a new home entertainment system.

Credit cards

Credit cards make it easy to spend money you don’t have and get instant gratification. Unfortunately, once interest charges start to accumulate on your credit card charges, your debt levels can quickly rise.

Credit cards come with some of the highest interest rates around, with many cards carrying rates as high as 19.99%. And if you run up a hefty bill on more than one card, your debt will get even more difficult to manage. Credit cards are also notorious for charging loads of fees for balance transfers, foreign transactions, currency conversions, late payments, annual card maintenance, cash advances and more.

How to manage your credit card debt

Credit card interest rates can be high and extra charges can add up quickly, so it’s important to get on top of your balance (or balances) as soon as possible. Here’s what to do:

Make regular repayments

Always make at least the minimum payment before the due date. If you’re someone who tends to be forgetful, use the autopay option to ensure you never miss a payment.

Usually you’ll have to pay between 2% to 10% of your total balance. However, since interest is calculated based on your daily balance, you can actually reduce the amount of interest that’s charged each month by making additional repayments.

How much can you save by changing payment frequency?

Let’s say your credit card debt is $5,000 and your minimum repayment amount is 2%, or around $100 per month. If your card’s interest rate was 18%, here’s the different interest charges you’d get depending on your payment options:

  • Monthly payments of $100: $45.86 in interest per month
  • Bi-weekly payments of $50: $44.83 in interest per month
  • Weekly payments of $25: $44.64 in interest per month

When compared to monthly payments, you can save around 3.3% by making payments bi-weekly and 3.6% by making weekly payments. The more you pay overall, the better the savings could be.

Pay more than the minimum

It would take years to pay off your credit card if you only paid the minimum amount each statement. Check out the example:

DebtInterest rateMonthly paymentTotal cost with interestYears to payoff
$5,00018%Minimum of 2% monthly$17,18133 years
$5,00018%$300$5,6981 year and 7 months

It would take 33 years to clear the balance paying only the minimum. However, if you paid $300 per month, your credit card debt would be paid in 1 year and 7 months and cost a total of $5,698. That’s big savings.

0% balance transfer

Consider moving your debt to a card that offers 0% interest during the introductory period, which can typically last anywhere from three to 12 months. Balance transfer credit cards give you a window of time to make repayments without accruing extra interest.

The only thing to be aware of is that at the end of the promotional period, the 0% interest rate reverts to a higher standard rate. So ideally, you’ll want to be able to clear your debt before that happens.

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Car loans

Many car loans are secured by the vehicle you’re purchasing, and as such, the lender gets to keep the car if you default on the loan. Auto financing is offered through banks, private lenders and dealerships. Dealerships may offer the quickest financing with greater room to negotiate, but you may get a lower rate elsewhere.

It can be a good idea to get car loan pre-approval from your lender before buying, as this will allow you to approach sellers knowing how much you have to spend. If dealers know you’re pre-approved for a certain amount, they may be more willing to work with you, so they can land a sale. Typically, you have 60 days from when you’re pre-approved to purchase a vehicle.

How to repay your car loan

Whether it’s your first set of wheels or a shiny new upgrade, a car loan is a popular way to finance the purchase. Since vehicles depreciate within a few years, you could find yourself stuck making repayments on a car that’s not worth half as much anymore. Here’s what you can do about it.

Make additional repayments

Depending on the type of car loan you have, you might be able to make additional or lump sum repayments to help pay it off faster.

Car loan amountInterest rateMonthly paymentTotal cost with interestYears to payoff
$30,0008.76%$620$37,1455 years
$30,0008.76%$800$35,1813 years and 8 months

That’s a total savings of almost $2,000 by making an extra payment of $180 each month.

Find out what restrictions your car loan has

Lenders may have limits on additional or lump sum payments, especially for fixed-rate car loans. These loans also often have early termination fees that could cost you hundreds of dollars.

Check if you’re paying for extras

Some car loans provide extras that could attract additional fees and charges. If these features are voluntary, you could save money on your loan by opting-out of them.

Always compare features and fees that will increase the cost even if the interest rate seems low. To put this in perspective, paying just $20 per month in administrative fees would cost you $1,200 on a 5-year loan.

Consider refinancing your car loan

If your current car loan is costing you too much, it’s possible to refinance your loan by switching to a cheaper loan offered by a different lender. This can help you save on interest, additional fees and even offer more flexibility with repayments.

Be sure to weigh the costs first, as refinancing could lead to exit fees from your old loan and origination fees for the new one. Compare your options to see if refinancing will help you save money and payoff your car faster.


How to cut down your student debt

There are lots of financial factors that can lead to debt when heading off to university or college. From student loans, credit cards, personal loans and car loans for students, here’s what you need to know.

Student loan debts

Unless you pay your tuition upfront, you’ll likely be taking out a student loan to help pay for college or university. Whether it be a government or private student loan, there are a few ways to score better interest rates and get out of debt faster.

  • Refinancing. By refinancing your student loan debt, you are simply taking your original loan and shopping around for better interest rates and repayment terms.
  • Consolidating. Consolidating is essentially the same process as refinancing, except it involves multiple loans. This could simplify two or three different payments into one single monthly repayment.

Student credit cards

Getting a credit card when you’re a student can help you pay for textbooks, supplies and food. However, if you use the card irresponsibly, it can have a serious impact on your debt. So, if you do decide to get a card, use the following tips to manage it responsibly:

  • Compare cards and choose one with low rates and fees.
  • Always budget for your repayments.
  • Aim to pay off the full amount by the due date on your statement.
  • Only use it when you know you can afford to pay it off by the due date.

Student car loans and personal loans

Students can also apply for personal loans and car loans through private lenders and banks. If you’ve never had a loan before, here are the key details to help you make it work for you:

  • Compare your options before you apply to find a loan that suits your circumstances and needs.
  • Check the fees and budget accordingly.
  • Always make repayments before the due date to avoid penalties and extra fees.
  • See if you can make additional repayments.
  • Contact your loan provider with any questions — it’s their job to help you.

Mortgages

Graphic depicting man investing in a homeTaking out a mortgage to buy a home can land you with a loan of several hundred thousand dollars or more. This is likely the biggest debt you’ll have in life.

Because mortgages are so large, interest charges end up costing a lot over the life of the loan. You’ll spend many years paying off a mortgage, so financial discipline is a must. Make extra repayments, if allowed, and regularly review your mortgage agreement to see if you can refinance and get a lower interest rate, which can help you pay down your debt faster.

How to manage your mortgage

While the dream of owning a home or a bunch of investment properties is very appealing, mortgage repayments can quickly bring us back down to earth. Still, your dream for property can become a reality and stay affordable with the following tips.

Pay the principal and interest rate

This type of repayment – sometimes referred to as “P&I” – covers the cost of both the principal amount you borrow and the interest. P&I repayments are more expensive than interest-only repayments, but they help save you money in the long run.

Home loan amountTermInterest rateMonthly paymentEst. total cost of loan with interest
$500,00030 years5.50%$2,291.67$825,000
$500,00030 years5.50%$2,838.95 ($700 more towards principal)$522,020

By making P&I payments with more towards the principal, your total savings on interest would be more than $300,000 over the 30-year term, or around $10,000 per year.

Change your payment frequency

Interest on your mortgage is calculated daily and paid monthly. This means you could be able to save some money on interest charges by choosing to pay in bi-weekly or weekly installments. Be sure to check the restrictions and terms based on your payment frequency.

Pay more than required

If your loan allows it, you could save a small fortune by paying extra on the monthly amount. There’s a few different ways you could do this:

  • Lump sums. If you come into a large amount of money, you could put a chunk of it towards your home loan to shave off some of what you owe.
  • Higher repayments. Paying more than what’s required for the month will help you reduce the cost in the long run.

Even a small amount can have a big difference over the long term. Always check the terms and conditions of your loan to make sure extra payments won’t attract additional fees or charges.


Personal loans

Personal loans give you fast and easy access to money for all types of purposes like renovating your home or even buying a car. These types of loans can be used for just about anything but can be dangerous if you focus more on your immediate need rather than your ability to pay off the loan.

If a personal loan is secured by an asset, for example, a vehicle or valuable artwork, you run the risk of the lender repossessing the asset if you default. There’s no such risk with an unsecured personal loan, but the higher interest rates on these loans can cost you more if you don’t pay off the loan quickly.

Paying off a personal loan

Personal loans can be used for just about anything from financing a vacation to paying for large purchases or consolidating debt. Depending on the type of loan you get, you could consider some of the following strategies to keep your debt at bay.

  • Make additional repayments. Usually available on variable rate or unsecured personal loans, this strategy allows you to save money on interest and pay off your loan faster and earlier.
  • Choose a short repayment term. You’ll pay less each month with a longer term, but it’ll end up costing more over the life of the loan. By opting for the shortest loan term you can afford, you’ll keep costs down. You can always contact your issuer to request a longer or shorter loan term.
  • Set up automatic payments. Personal loan repayments are usually the same each month, which makes them easy to budget for. To simplify repayments even more, you could look at setting up an autopay so you don’t have to do it manually every month.
  • Move the remaining debt to a 0% balance transfer credit card. If you have a small balance on your personal loan, you could save money by moving it to a credit card that offers 0% interest on balance transfers for a promotional period (usually between 3 and 12 months). Before you apply, make sure you compare your options and consider whether you’ll be able to pay off the balance during the promotional period.

What are the different ways of dealing with debt?

Debt repayment plan

While harder in terms of the self discipline and focus required to make it work, following a debt repayment plan to pay off your loans may be cheaper and more rewarding than getting a debt consolidation loan or refinancing. It also keeps you clear of more drastic debt management options that have a long-term negative impact on your credit, like submitting a consumer proposal or declaring bankruptcy.

The Government of Canada website is a great place to start if you’re looking for nonprofit organizations that offer credit counseling and financial management services.

Debt consolidation loan

If you’re paying interest on multiple debts and you’re struggling to make repayments, it might be time to consider a debt consolidation loan. Designed to help you take control of debt, these loans allow you to roll multiple debts into one loan. This means you only have one monthly repayment rather than several, and you even may be able to lower your overall interest fees.

Use our debt consolidation calculator to see how much you could save with a consolidation loan. If you decide this option is right for you, carefully compare offers and only borrow from a reputable lender.

Balance transfer credit card

Graphic showing a person being rescued from credit card debtBalance transfer credit cards allow you to transfer your existing credit card debt over to a new card. You’ll typically get to enjoy a low promotional APR for a limited time period (usually 6-10 months). This means you can avoid high interest charges and consolidate your credit card debt, providing significant savings as you pay off the money you owe.

However, a balance transfer fee and annual fee may apply. Keep in mind that once the introductory period ends, the interest rate will revert to a higher rate.

Refinancing your mortgage

Refinancing your mortgage can potentially lower the interest rate and provide enough extra money to consolidate other debts like credit cards, personal loans and car loans. This could provide your with one, easy monthly payment instead of multiple, separate payments.

You’ll need to closely consider the interest rates and fees associated with refinancing, making sure to compare loans from a variety of lenders. You should also be aware that consolidating short-term debt into a mortgage with a 30-year term may not be the most cost-effective option.

Consumer proposal

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A consumer proposal is a legally binding repayment agreement between you and your creditors as negotiated by a Licensed Insolvency Trustee who acts on your behalf. If you enter into such an agreement, your creditors agree to forfeit their right to full payment in favour of accepting whatever you can repay over a specified time period. Once you’ve paid this money, there is no way for your creditors to recoup the rest of your unpaid debt.

Consumer proposals should only be considered after you’ve explored all other options. This option for debt relief will stay on your credit report for 3 years and can seriously hurt your ability to access more credit. Speak to a debt counselor near you for more information.

Bankruptcy

If you’re completely unable to pay off your debt, you have the option of applying for bankruptcy. This step is a last resort and should only be taken after you’ve explored all other debt consolidation options and sought professional financial and legal advice.

Bankruptcy is when you legally declare that you’re unable to repay your debts. Applying for bankruptcy will release you from unsecured debts such as unsecured personal loans, credit cards debts and overdue bills. Furthermore, creditors will not be allowed to pressure you to repay, and your wages will not be garnished (though you may have to make payments if your income is above a certain threshold).

But, bankruptcy stays on your credit report for 6 years (14 years the second time) and can seriously prevent you from accessing credit in the future.

Debt repayment assistance for Canadian military members

Emergency funds are available to veterans, reserve forces, regular forces and their families through Support Our Troops, the official charity of the Canadian Armed Forces. Visit supportourtroops.ca to learn more about available funding and to apply through a local SISIP Financial Counsellor. You may also want to take a look at income support services offered by Veterans Affairs Canada.

If you or a family member lacks the basic necessities of life or you’re unable to pay a personal debt due to sickness, accident, death or some other misfortune, you could qualify for a low-interest loan of up to $25,000 or a grant of up to $5,000.

You could get a loan of up to $5,000 for emergencies, urgent home repairs, prevention of financial distress, health and safety issues and education (if you’ve been denied a BMO CDCB Student Line of Credit).

If you’re in financial distress, you could get up to $2,000 in immediate financial support (for crises occurring within 24-72 hours). Eligible situations could include being transported to a medical facility for emergency procedures, preventing eviction or foreclosure, preventing utilities such as heat or hydro from being disconnected and covering uninsured medical or dental emergencies.

Families with special needs dependents can receive up to $1,000 for uninsured assessment and reassessment costs and up to $1,000 to help cover uninsured assistive devices, prescriptions, therapy, medical travel and respite care.

Banking products for members of the Canadian Armed Forces (CAF)

Must read: Should I use my savings to pay off my debt?

It might be tempting to use your savings to pay off your debts, given how accessible the money is and that you won’t have to go into debt. Before you dip into your savings, ask yourself these questions:

  • Do I have enough emergency funds? Many experts advocate saving around 3-6 months’ worth of your living expenses in case you lose your job or can’t work for some reason. If you don’t have this in place, it could be risky to use whatever you do have to pay off debt.
  • Am I gaining or losing money by keeping my investment savings? If the interest rate earned on your investments is lower than the interest rate applied to your debts, then you’re losing faster than you’re gaining. It could be worth it to shift funds from investments to pay off your debt, however, this will slow down your long-term savings. Speak to a financial advisor to find out if this is right for you.
  • Will I have to pay any penalty fees or taxes? Many retirement accounts come with early withdrawal fees or a penalty tax that could eliminate any benefit in making a withdrawal. For example, early withdrawals from an RRSP are subject to a 10% tax for amounts at or under $5,000, 20% for amounts above $5,000 up to $15,000 and 30% for amounts beyond that. So, if you have $15,000 in credit card debt and want to take $15,000 out of your RRSP to pay it off, you’d only have $12,000 left from the withdrawal after taxes.

What would you personally sacrifice to get out of debt?

For many people, becoming debt-free may seem impossible. It would be great to reach a point where you’re not keeping track of multiple due dates and paying hundreds or thousands of dollars toward interest payments.

Debt can stack up for multiple reasons beyond your control, including paying for unexpected bills or surprise home and car repairs.

Realistically, if you’re in debt because you’re living a lifestyle you can’t afford, you’ll have to make sacrifices. In order to get rid of your debt, you’ll need to live below your means.

Getting rid of your debts is a choice entirely in your control

If you’re serious about being released from the shackles of debt, would you be willing to temporarily live without certain comforts or luxuries? Becoming debt-free is not impossible — it simply boils down to how badly you want it.

What are you willing to give up to get back in control?

    • Would you give up your possessions?

      Could you manage without a television? Or a computer? Or the latest iPhone? Giving up your television not only gets you extra cash in hand, but it also means you won’t have to pay a cable bill each month.

      You might want to keep your computer to stream free content in lieu of your TV, but luxuries like the new iPhone aren’t necessities — especially if you already have a working phone. You might even want to look at a cheap cell phone plan to save some extra cash. Many pay-as-you-go plans are budget friendly.

    • Would you give up your house?

      Would you be willing to live in a smaller house to conquer your outstanding debts? If you have enough equity in your house, you can consider putting it up for sale. If you’re struggling to meet your daily expenses, renting out your property or utilizing Airbnb might be a cost-effective way to pay your mortgage.

      The following options might be worth looking at as well:

      • Sell your house and rent it back from the buyer (this will save on moving charges).
      • Keep your current house, rent it out and move to a smaller house.
    • Would you give up your vehicle?

      A car comes with its own recurring expenses like gas, insurance and maintenance that you could pocket if you lived without one. Assuming that your car is in good shape, you could also consider selling it and using public transportation to get around.

      Consider the following before you sell:

      • If you want to keep your car, you can drive for Uber or Lyft to make extra cash. Heard of Turo? You could rent your car for extra cash during the week with its service. You could easily rent a car for a day if you’re really in need of one.
      • If you do want to sell, think about the area you live in and see if it’s realistic to use public transportation every week. Remember, a car usually only depreciates in value, so you won’t make a profit or break-even once you sell it.
    • Would you give up your daily comforts?

      daily-coffeeOften when people live beyond their means, they make purchases that they don’t end up using.

      • Some people purchase expensive memberships at the local gym. Give up your membership and stay fit by walking or jogging.
      • Cut down on those cups of coffee you “can’t live without”. Buy coffee and keep it at work — you’d be surprised how much money you’ll save.
      • Eat healthy, home-cooked food instead of eating out all the time. Similarly, take your lunch to work too.
      • Are you paying higher insurance premiums for excessive coverage? Make sure your premiums are realistic and affordable.

      These are all general tips, but if you look at your expenses, you’ll see some places where you can really stand to save.

    • Would you give up your time?

      After work, many people like to kick back and relax. What if instead, you took a part-time job to earn extra cash — perhaps in a shop you love or a bar you frequent.

      Have you considered consolidating your debt?

      Debt consolidation allows you to combine your existing debt into one single repayment with only one lender. In addition to simplified repayments, you could save money by getting a lower interest rate and a better loan term when you consolidate. It generally makes sense to consolidate your debts — it’ll make managing your finances a lot easier.

What if I can’t manage my debts?

If you’re seriously struggling with some — or all — of your debts, try to stay calm and follow these steps.

  1. Contact your provider/s and let them know your situation. They will be able to help you find a solution that works for everyone.
  2. Consider debt relief. Debt settlement companies work on your behalf to negotiate your balances and set up payment plans — and could save you up to 30% on your debt.

Along with bills and taxes, dealing with debts can be a major part of adult life. However with these tools at hand, you should be able to get on top of the money you owe and pay off your balances in a way that’s affordable for you.

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