Having a debt refers to owing something. This typically can mean owing money, favors, having obligations or owing assets or physical property. Financially, taking debt refers to borrowing money which is to be paid back at regular intervals along with interest.
Historically, debt had been responsible for creating indentured servants. However in the modern world, the creditor usually agrees to give an amount with the assumption that the debtor will pay back the principal amount along with the interest.
Mode of debt payment
Before a debt is formalized, it is mandatory for the debtor as well as the creditor to come upon an official agreement on the technique of repayment of the debt, also called the standard of deferred payment. This payment is typically denominated as the total money in currency units and can also sometimes be agreed upon in terms of payment of goods. Payments are either done in increments throughout a certain time period or cumulatively at the end of the agreement period.
Types of debt
Debt generally belongs to two categories: consumer debt and corporate debt. Consumer debts are of the following types:
• Home loans or mortgages: This is the biggest form of debt carried by consumers. Housing boom had led to continually refinancing mortgages by several consumers, resulting in rise of debt levels. However the additional wealth that was generated boosted discretionary spending. The recent crash of home prices have led to many consumers desperately attempting to repay a greater amount of their mortgage for reducing their debts and are facing great trouble associated with repayments. Many people had to part with their homes due to foreclosure.
• Credit card debt: Consumers typically do monthly purchases using credit cards and the debt gets rolled over every month. Giving minimum amount each month towards card account payments result in spiraling of the actual amount.
• Bank loans and overdrafts: Consumers make use of bank loans for purchasing cars or making home renovations. Overdraft refers to drawing more than the amount that is present in the accountholder’s balance, and replenishing the same to the bank on the pay day. Both loans and overdrafts can spiral beyond control.
Corporate debts can be of these types:
• Secured debt: This refers to the creditors having access to company assets in case the latter defaults in debt payment.
• Unsecured debts: In these types of debts, the creditor has no control over company assets.
• Private debt: This refers to bank loans and other types of similar debt.
• Public debt: This is a freely trading debt like bonds and commercial paper.
• Syndicated debt: This refers to multiple banks and creditors coming together for providing the principal loan amount – “yndicating”the debt.
It is unfortunate that consumers do not consider debt reduction until it is very late. You should always use certain budgeting guidelines to work out a comfortable level of debt payment for yourself. You should be ideally paying not more than 15% of your monthly income towards personal loans, credit cards, and other forms of loans.