Debt Glossary of Terms

A debtor is one who owes money. A debtor can be an individual consumer who incurs debt for personal, family or household purposes or a business. When debt is in the form of a loan from a financial institution, then the debtor is called a borrower.

An interest rate is calculated as a percentage of the principal that is charged on a daily, monthly or annual basis. Higher rates will apply to a borrower that is considered a higher risk of defaulting on a loan, while lower rates are charged for lower risk clients.

Two calculations for interest rates are most common. A simple interest rate is the principal amount borrowed multiplied by the annual interest rate multiplied by the number of years the loan is outstanding. A compound interest rate additionally takes into account accrued interest from the previous months. There is not much difference between the two calculations for short periods, but the disparity between them increases over time.

A fixed or variable interest rate can apply to debt. A fixed interest rate (such as applicable to credit card debt) remains fixed for the entire term. A variable rate fluctuates according to changes in a benchmark interest or index, such as the Bank of Canada interest rate.

A mortgage is a loan used to raise funds for purchasing real estate or by existing property owners to raise funds for any other purpose. It involves putting a lien on property being mortgaged. The mortgage is secured using the borrower’s property as collateral, and the lender can take possession of the property if the borrower is not able to meet their payment obligations.

Personal bankruptcy is the act of declaring that you have no money, eliminating all your debts. It is filed by a Trustee under the Bankruptcy and Insolvency Act, allowing you to gain a fresh financial start. However, it will leave a mark on your credit report for many years, which may affect other things down the road.

Refinancing is what occurs when a person or business revises their debt repayment schedule. The old debt is ostensibly paid off and is replaced with a new loan offering different terms. It typically extends the maturity date of the loan. Refinancing may involve a penalty or fee.

Revolving credit is a line of credit that automatically renews as debts are paid off. The customer pays a commitment fee, allowing them to use funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the cash flow needs. Corporations and individuals can apply for this type of credit.

Secured debt is debt backed or secured by collateral (e.g., a mortgage is secured by a house, a car loan is secured by the car). If you default on repayment, the lender can seize the asset, sell it and use the proceeds to pay back the debt. Because securing debt reduces risks for the lender, the loan terms (e.g., the interest rate, loan time period) are more attractive for the consumer than with unsecured debt.

Seizure is when you are unable to pay your loan or debt, and the creditor is allowed to take possession of some of your assets to pay the loan instead. An example would be a client who has a car that they finance and cannot pay for. The dealership would be able to seize the car and sell it to pay off the rest of what you owe.

Unsecured debt is a loan advanced without any security provided (e.g., credit card balance, utility bills and other types of loans or credit). Unsecured debt is a higher risk to the lender and so the lender will require a higher interest rate in return.