Debt to equity ratio and other financial terms you should know

If you are serious about taking control of your finances, then there are a few key terms that you should be familiar with.

debt to equity ratio financial terms

“You don’t have to be a financial expert to reap the benefits of financial literacy. Understanding a few financial terms puts you in a better position to understand your options when it comes to your finances. You’ll be better able to pay down your debt and devise a strategy to reach your financial goals,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

Here are 4 financial terms that you’ll find helpful.

Debt to equity ratio

If you are trying to take out a mortgage, a lender will look at your income and your credit history, but will also take into account what the debt to equity ratio is for the home that you want to buy.

“It is in your favour to have more equity than debt in your home. Not only will you have higher mortgage payments, if you are a high ratio borrower (putting down less than 20 per cent), you’ll need to pay mortgage loan insurance, which is an additional, substantial cost,” says Schwartz.

Debt consolidation

A debt consolidation is when you combine all of your debts into one payment. You can either do this on your own through a balance transfer (if you’ve got room on a lower interest credit card) or you can get a debt installment consolidation loan through your lender.

Debt consolidation can be a very effective way to pay down your debt. Instead of paying minimums on several cards while interest continues to accrue, you are directing your payment to one place, putting more down on the principal of the debt.

Typically debt consolidation can open up your cash flow as well, reducing the likelihood for you to rely on debt going forward.

APR

If you are in the habit of reading your credit card statement (and you should be), APR is a term that you’ve seen before. But what does it mean?

Basically, the APR (annualized percentage rate) is the cost that you pay for borrowing money with credit. It refers to what you’d pay in a year if you were carrying debt forward. It’s important to know what your card’s APR is and how is it calculated, because it can help you budget to pay debt down. It can also help you identify if you are acquiring extra interest charges (like for cash advances or other purchases) that could make it harder to pay debt down.

RRSP

RRSP stands for Registered Retirement Savings Plan. It’s common to think that an RRSP is an investment. It’s not. It’s a tax sheltered group of investments, meaning that the investments you place within your RRSP grow tax free until you withdraw them.

And did you know that your RRSP isn’t just for retirement? You can withdraw funds to use for a down payment for a home under the Home Buyers Plan. You can also withdraw funds to use for your education if you are returning to school under the Lifelong Learning Plan. Both of these uses can reduce your need for debt.

Are you trying to get on top of your debt? We can help you learn more about your finances to come up with a plan that works. Call one of our trained credit counsellors at or visit our online  debt analysis.

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Shivani Karwal
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