What is Debt:
For many people, debt is considered undesirable. In the business and finance world debt means the amount of money owed to be repaid, either to someone else or a group. One of the common categories of debt is personal debt.
Personal debt is money owed to another person or persons. Personal debt is gained when borrowing money for personal purposes. There are a few types of personal debt including secured debt, revolving debt, and unsecured debt.
Secured debt is a debt many people incur. Secured debt is debt with an asset as collateral to the lender. If the borrower does not pay back the loan for some reason, the collateral asset can be seized by the lender to recover the funds. Some examples of this include car loans and mortgages. Car loans are a common debt for most people, especially ones living in the city. They are generally taken out to be able to buy a car more affordably. Mortgages are one of the largest debts anyone can have. They are loans used to purchase a house. Typically speaking, they have lower interest rates than other consumer loans. To make mortgages more affordable, they are most commonly lent in 15-year or 30-year terms.
Unsecured debt is debt with no collateral. The lender completely depends on the borrower to faithfully repay their debt. Interest rates are sometimes higher because of no collateral to the lender. However, the borrower is bound by contract, the lender can go to court to reclaim their money if the borrower does not repay the loan. But, that is expensive so most lenders do not do so. Some examples of this include utility and medical bills, where they are paid based on credit and not collateral.
Revolving debt is also a common debt for most people to have in this day and age. This type of debt happens when there is a lender and borrower agrees to let the borrower borrow up to a maximum limit on a periodic, or recurring basis. A common example of this type of debt is credit cards. When you use a credit card, you are borrowing money on credit. At the end of the month, you pay money to your bank to lower your credit card balance or have no balance.
Written by Allie Chang