What is a Debt?
Debt is the term used for the money, which is borrowed by a person, an organization, or by a firm to fulfill their purchasing needs that could not be accomplished with normal capital resources. The party who lends the money usually sets up a special agreement according to which, the borrower has to pay back the money with some calculated amount of interest on the specific date.
The terms of the agreement also specify the amount of the interest the borrower has to pay annually. Interest is a mechanism, which ensures the lender that his risk of lending money will be compensated. Interest also promotes the borrower to pay back the loan quickly before the interest rate and expense increases.
What are the different types of Debt?
There happens to be a variety of debts that exist and before you start to pay them off, you need to be aware of its significance and what type of priority it holds. One needs to know what debts are more important so that they can be paid off immediately, otherwise, consequences follow.
Not being able to pay off a debt can result in one being forced to leave their home or any other important assets. We will be looking at the four most important debts below:
These debts happen to be “backed” by collateral so that they can condense the risks that are attached with the lending. In case of the borrower failing to make the payment, the bank is allowed to seize their property or assets. They are allowed to sell it, so the money made by selling those can be used to pay off the remaining or total debt. This is why before borrowing the borrower puts a certain asset as a security that if they fail to pay back, the bank is allowed to make use of that.
These are debts that unfortunately are not “backed” by collateral. This means that this type of debt does not need any security. If the borrower fails to pay an unsecured debt, the lender is allowed to get the law involved. Meaning that they can get the borrower sued.
These is a type of debt security that is issued by a firm and then is vented to those, who are keen on investing in the firm. Corporate bonds are backed by the corporation itself or the capability of the firm to make the payments. These payments are earned through the future activities that the company performs and then reaps the profit. However, corporate bonds have high-interest rates attached to them.
Credit Card Debts
These are the types of unsecured liabilities which exist because of credit card loans. Usually, borrowers happen to create this type of debt by generating a great number of credit card accounts that have different credit limits dictated or set. Since the credit bureaus happen to analyze all the accounts, they are able to see the debts. Such debts come in handy to those who want to make payments over a course of the period provided. There is no surprise that the credit card debt has a great interest attached to it. Yet, it still allows these borrowers to pay off their debt on monthly basis, which is a hallelujah moment as that can save them the wrath of the high-interest rates.