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Is All Debt, Bad Debt? Part 1

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Is All Debt, Bad Debt? Part 1

Mike De Sousa

Let’s talk about debt. Yes, debt. The mere mention of that little “d-word” can make a lot of people uncomfortable. Despite your pre-conditioned ideas about it and the feelings it brings up, we’re here to clear up a few misconceptions and (hopefully) having you feel a little better by the time you finish reading this post.

First off, let’s distinguish between two main kinds of debt, secured and unsecured:

Secured Debt

Some examples of secured debt would be a mortgage or a car loan. Basically, secured debt pertains to a situation when if you were to fail to make payments (on a regular basis, for the most part) something tangible could be taken away. For example, you may have heard of a car being repossessed.That would be because the owner failed to make payments.

Unsecured Debt

Unlike with secured debt, unsecured debt doesn’t have any collateral. If you don’t make a payment, no one is going to come and take away your home or car. An example of unsecured debt is your credit card. If you don’t make a payment, you will be charged interest on that amount the next month. If you fail to make payments on a regular basis, you could run the risk of the credit card companies sending collections your way.

But, this is where things get tricky. At the outset, you may think that unsecured debt is great because there’s no collateral. However, the interest rates on unsecured debt are typically very high, simply because the credit card companies don’t have anything to take back in return. Plus, it’s costly for them to hire a collections agency to retrieve payment.

We hope this gets you started thinking about debt, instead of worrying about it. In next month’s post, we’ll take a little closer look at how having a mortgage can actually be good debt.

In the meantime, if you are looking to get some more information and want to speak with a specialist, get in touch with us today.

Thanks for reading!

Mike De Sousa and Mindy Small

Your London, Ontario Mortgage Brokers