Debt plays a vital role in our everyday lives. We use our credit cards to buy groceries, watch movies and book our holiday vacations. We use personal loans to finance our cars and homes and lines of credit to pay for our home renovations. Incurring debt has been common practice among Canadians due to its convenience and accessibility. However, debt can become bad quickly if you fail to understand how to manage it.
Here’s 3 major negative impacts of too much out of control debt
- Leads to even higher interest rates and cost of borrowing when applying for long term loans and mortgages
When you decide to apply for a car loan or a mortgage, the first thing banks look at is your ability to repay debt. If your history shows that you have almost always maxed out your credit card debt and have missed too many payments due, chances are that banks who offer lower interest on long term financing will decline your application. At such situations, you are then left at the mercy of alternative financing institutions who can charge up to 5% higher than typical rates offered by banks just because of your credit rating. You are also considered a delinquent client and these same institutions can charge you 1% or more in lending fees as well as collect 6 months mortgage prepayment from you before the 1st month of payment is due. This type of financing are most ideal for short term needs and not to sustain a long term mortgage because they tend to be too expensive for the average Canadian to handle.
- Potential refusal for future long term financing applications
If your debt load is more than what your income can handle, you may not be able to get out of it without filing for bankruptcy. This is because of the piling interest and penalties institutions can charge you due to your inability to make payments. Filing a bankruptcy is deemed as the only way out in this scenario however, filing a bankruptcy could also mean that the same banks who had given you credit cards before may not give you any form of financing after a bankruptcy is filed. This becomes a dead end for most Canadians as bankruptcies tend to stay on your credit report for a while and the banks you had owed money to will mark you as a derogatory client and will never approve any future financing applications you may place with them.
- Marital/relationship breakdown and mental health impacts
Financial problems most often cause rifts in your relationships with family and loved ones. Due to the anxiety of being unable to pay your debt, your attitude and interaction towards your friends and loved ones could change. This could result in you isolating yourself and becoming depressed by your current predicament. This could also cause underlying health issues to surface which could lead to you being unable to work and incur even more debt.
Debt could be something vital and beneficial for our daily lives if used wisely. Contact us today to know how you could prepare yourself financially and mentally before you decide to purchase a home.
