Debt

Personal debt is money that’s owed for purchasing personal or household items. It can include money owed on credit cards, loans and mortgages. 

Most people will carry debt at some point in their lives, and that’s not necessarily negative. When debt is well-managed, it has the potential to get you one step closer to whatever you want to make possible.

Secured vs. unsecured

Secured debt includes placing a security (i.e. collateral) for the loan. Examples of collateral you can put against the loan include personal property, investments or other eligible securities. If you’re late on a payment, the bank can take your asset and sell it to get back their costs. Two common types of secured loans are mortgages and car loans.

Unsecured debt doesn’t have collateral against it. You can use it for specific purchases or consolidating debt, such as paying off credit cards or combining small loans. You don’t need to have a tangible asset, but your credit score will determine the loan you qualify for and the interest rate you’ll pay. An outstanding balance on a credit card is an example of unsecured debt.

Step 1: Know your debt situation.

To create a plan for debt repayment, you need to fully understand your debt situation. Make a list of all your debts, including your credit cards, loans, lines of credit, mortgage and any other money you owe.

By having a full picture of what you owe, you are set up to tackle your debt with confidence.

Step 2: Know your cash flow and expenses each month

Use this worksheet to organize your monthly expenses into variable and fixed expenses.

Once you know your expenses, take a look at where you can cut spending to help maximize cash flow for debt repayment. For example, you might be able to cancel a subscription service you’re not using. If you eat out for lunch every day, maybe you can eat out once or twice a week instead.

The key to prioritizing your spending is not to deprive yourself of the things you enjoy, but to cut out the things that matter less to you, so you can learn to spend in moderation. This will free up funds each month to put towards paying off your debt and ultimately getting you one step closer to your goals.

Step 3: Develop your debt repayment plan

There are a few different ways to repay debt. Once you find a method that works best for you, consistency will make you successful. Here are some common debt repayment strategies:

The snowball method
Start by paying off your smallest debts first. Once the smallest debt is paid off, move onto the next lowest, and then the next. You’ll always be making minimum payments on your other debts while you do this.

Say you have a $4,000 car loan with a six per cent interest rate and a $9,500 credit card debt with a 19 per cent interest rate. You would choose to focus on paying back the car loan while making minimum payments on the credit card debt.

With this method you’ll see results right away, which can give motivation to continue paying off the debt.

The downside of the snowball method is the smallest debt might not be the highest interest debt. In some cases, you could end up paying more interest on that high-interest debt in the long run.

The avalanche method
Start by paying off your highest interest debts first, while making the minimum payments required on your other debts. You will pay less interest with this method, but it might take you longer to start paying down these debts off.

Let’s use the same example as above of a $4,000 car loan with a six per cent interest rate and a $9,500 credit card debt with a 19 per cent interest rate. Using the avalanche method, you’d pay off the credit card first because it has a higher interest rate.

A benefit of this strategy is that you’ll save money on interest over the long term. However it will take longer to repay the debt.

Debt consolidation

In this method, you would borrow a sum of money to pay off a number of debts. This method allows you to make one payment instead of managing several. 

Debt consolidation isn’t the best option for everyone. It can come with higher interest, restrictions and certain criteria must be met. Talk with your financial institution to see if this option could work for you.

Step 4: Set yourself up for success

The best plan to repay debt is the one that works for you. As you set up your plan, you should feel confident and in control of your finances—this will bring you long term success. Once you’ve set your plan, stay consistent and you’re well on your way to paying off debt and meeting other financial goals.