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Debt

May 21, 2022 • 2 min read

Debt can be used in a broad spectrum of ways, but the most common is in the financial and economic spectrum.

Debt refers to something owed on money or goods borrowed from a financial institution. The person who incurs the debt is obliged to repay or return the value thereof, usually with interest.

Depending on the situation, debt can range from small-scale loans between one person and a bank, or large-scale government debt which is used to balance out a government deficit.

Key aspects of debt:

Debt is money owed by a person or entity to another.
Debt can be used to make a large purchase, but in return, the borrower will be obliged to repay the debt with interest, which can result in increased debt.
In some instances, it might be required for you to already have some form of debt in order to take out a loan or improve your credit rating.

The five main debt categories

Secured Debt

This can refer to assets with a high rate of collateral, examples include houses, cars, boats, or other forms of investments.

Secured debt is used to secure a large loan amount, thus a borrower will use secured debt collateral items against the amount they intend to loan.

Unsecured Debt

In some instances, some borrowers may already have a well-established credit history, which puts them in a position to secure a loan or incur debt without the need for additional debt collateral or security. Unsecured debt can be credit cards, car loans, or even student loans.

Revolving Debt

Revolving debt allows a person to borrow funds to a certain amount until it runs out. Afterward, they can either repay the full amount or make monthly installments until the full amount has been repaid. Once they have repaid the outstanding debt, they can then borrow that amount again.

The most common form of this is with credit cards, which allows people to use a certain amount, make the repayments, and offer them either the same amount to borrow or more.

Mortgaged Debt

Mortgage debt requires collateral or a deposit of some sort, as it involves a larger amount of debt or money borrowed. A bank may issue a mortgage loan to a person, against an interest rate. The person is then liable to make the necessary repayments on that debt over a given period. Mortgage debt can take up to 20 years at most to repay in full.

Senior Debt

As companies structure the order in which they will be required to repay their debts, senior debt will receive prevalence before junior debt and will be paid off first. See more details about seniority here.

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