Definition of Debt: Knowing the Different Debts and Types

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Everyone basically knows the definition of debt but the major issue generally lies on the repayment term; not on the understanding of the term itself. Never underestimate your debt if you don’t want to fall deeper into the issue. A lot of people tend to underestimate it, thinking that they get everything. In reality, debt is a serious matter. Neglect it and you will fall into a deep hole, without any possibility that you will see a way out.

Definition of Debt

Definition of Debt, Understand the Condition

If you find the debt definition economics, you will see that a debt is the owed amount to a person or an organization for the lending. Others will say that it is an agreement between a borrower and a lender concerning a certain amount of money. In a simpler matter, when you borrow some money from someone (another family member or a friend) or an organization (a bank or a personal loan provider), you are having a debt. This is a much simpler version and explanation of definition of debt.

Having a debt is okay because most people can’t really afford some of the crucial things. Let’s say that you want to buy a house but you don’t really have the money. That’s why there is a mortgage. Or you want to continue your study to a higher level (for the sake of your future career and your future prospect) but you don’t have the money. That’s why you can always use the student loan.

Despite the different types of debt out there, the definition of debt is basically the same; there is a lender and there is a borrower making an agreement on a certain sum of money. But when you know the various types of the loans, making the right decision concerning the debt can help you.

As it was mentioned before, you really need to be smart about managing the debt. Having the debt itself isn’t the root of all evil; it is the irresponsible accumulation without trying to pay it back is. For instance, a credit card is included in the types of debt which is pretty common among people.

When you know how to use the card wisely and you know how to pay it back in moderation, your credit card won’t be the source of your misery. However, when you are using the credit card uncontrollably – and to make it worse, you use another credit card to cover for your current credit card expenses, don’t be too surprised if it piles up.

Based on the debt definition economics, there are some common terms about debt that you need to know so you know the difference and you should be able to decide which one is better for you and your requirements.

Secured debt is one of the most common terms in definition of debt as it is opposed to the unsecured debt. In secured debt, you need to have collateral or a security in the form of a car or a property that can be used as a payment. In the event that you can’t pay the loan back, the collateral will be used as a payment. A mortgage or a car loan is included in this type. The unsecured debt requires no collateral but the interest rate is generally higher. Take the example from personal loan or credit card.

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Other types of debt are the fixed and variable interest rate debt, as well as fixed payment term and variable repayment period. As the name suggests, the fixed interest rate loan is the type of debt with the same rate for the entire period of borrowing. The mortgage is an example of this type of loan.

The variable interest rate, on the other hand, has fluctuating rate, depending on the economy and the situation. Take a look at the credit card for this matter. If you take a look at the debt definition economics term, fixed payment term means that your debt should be paid on a certain date while the variable repayment type, you don’t have to deal with such a thing.

No matter what type of loan you take, it is crucial to know how to manage your financial well. Some people may have a discipline saving routine while others may hire a professional financial consultant or expert. Now that you know the definition of debt and how it affects your finance, you won’t be making a hasty decision, right?