Loans Loan and debt 1

Debt is anything owed by one person to another. Debt can involve real property, money, services, or other consideration. In finance, debt is more narrowly defined as money raised through the issuance of bonds. A loan is a form of debt but, more specifically, is an agreement .

Debt​

What Is Debt?​

Debt is something, usually money, borrowed by one party from another. Debt is used by many corporations and individuals to make large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.

KEY TAKEAWAYS​

• Debt is money borrowed by one party from another.
• Many corporations and individuals use debt as a method of making large purchases that they could not afford under normal circumstances.
• In a debt-based financial arrangement, the borrowing party gets permission to borrow money under the condition that it must be paid back at a later date, usually with interest.
• Debt can be classified into four main categories: secured, unsecured, revolving, or mortgaged.
• Corporations issue debt in the form of bonds to raise Capitals

Debt​

Understanding Debt​

The most common forms of debt are loans, including mortgages, auto loans, personal loans, and credit card debt Under the terms of a loan, the borrower is required to repay the balance of the loan by a certain date, typically several years in the future. The terms of the loan also stipulate the amount of interest that the borrower is required to pay annually, expressed as a percentage of the loan amount. Interest is used to ensure that the lender is compensated for taking on the risk of the loan while also encouraging the borrower to repay the loan quickly to limit his total interest expense

Credit card debt operates in the same way as a loan, except that the borrowed amount changes over time according to the borrower's need—up to a predetermined limit—and has a rolling, or open-ended, repayment date. Certain types of loans, including student loan and personal loan, can be consolidated.

Types of Debt​

There are four main categories of debt Most debt can be classified as either secured debt, unsecured debt, revolving debt, or a mortgage.

Secured Debt​

Secured debt is collateralized debt. Debtees usually require the collateral to be property or assets with a large enough value to cover the amount of the debt. Examples of collateral include vehicles, houses, boats, securities, and investments. These items are pledged as security and the agreement is created with a lien. Upon default, the collateral may be sold or liquidated, with the proceeds used to repay the loan.

Like most classes of debt, secured debt often requires a vetting process to verify the creditworthiness of the borrower and their ability to pay. In addition to the standard review of income and employment status, the ability to pay may include verifying the collateral and assessing its value.

Unsecured Debt​

Unsecured debt is debt that does not require collateral as security. The creditworthiness and the debtor's ability to repay are reviewed before consideration is given. Since no collateral assignment is issued, the debtor's credit profile is the primary factor used in determining whether to approve or deny lending.

Examples of unsecured debt include unsecured credit cards, automobile loans, and student loans. How much is loaned is often based on the debtor's financial position, including how much they earn, how much liquid cash is available, and their employment status.

Revolving Debt​

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.

The most common form of revolving debt is credit card debt. The card issuer initiates the agreement by offering a line of credit to the borrower. As long as the borrower fulfills their obligations, the line of credit is available for as long as the account is active. With a favorable repayment history, the amount of revolving debt may increase.

Mortgages​

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. However, mortgages are so unique that they deserve their own debt classification.