Debt is what someone owes to someone else. Usually, debt is in the form of money, but it can also be items, services, favors, or other things. Thus if you make an agreement to give or do something for someone else, you now owe a debt. Unpaid debt can lead to problems such as the Greek government-debt crisis.[1] Debt is used by governments, corporations and individuals to make purchases that they could not normally afford. Common types of debt owed by households and individuals are mortgage loans, car loans, credit card debt, and income taxes. In the case of individuals, debt is a way to use an anticipated income combined with the future purchasing power at present before earning the same. [2]
On the other hand, corporates have a multitude of options when it comes to debt. Companies may use debt for their working capital or day-to-day operations.
Goods, services or money borrowed with the intent of repayment (in kind or not) creates a debt. Debt can be classified as either secured debt, unsecured debt, revolving debt, or a mortgage.
A secured debt uses collateral, which is an asset that is promised to the debt-holder until the debt has been repaid. If the repayment is not made in full, the lender gets the collateral asset. For instance, a car loan typically creates a secured debt. If you still owe money on the car loan and do not make timely payments, the note-holder can take back (or repossess) the car and sell it to get the money still due. A home mortgage is similar.
An unsecured debt is more risky to the debt-holder (the lender, also called creditor). In the event of non-payment of the debt, the lender cannot take assets. Credit card debt is typically unsecured. If you charge items to a credit card and do not make the monthly payments, the credit card issuer can report the non-payment to the credit-reporting agencies. That will reduce your credit score so others will not lend you money. But usually they cannot take back whatever you bought with the card.
Revolving debt is a line of credit or an amount that a borrower can continuously borrow from. In other words, the borrower may use funds up to a certain amount, pay it back, and borrow up to that amount again. Revolving credit accounts are open ended, meaning they don’t have an end date. As long as the account remains open and in good standing, borrower can continue to use it.[3]
A mortgage is a debt issued to purchase real estate, such as a house or condo. It is a form of secured debt as the subject real estate is used as collateral against the loan.
- Asset (contrary notion)
- Debt bondage
- Loan
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