A debt is something you borrow from someone else, usually money. Debt allows you to make large purchases, such as a car or house, that you could not afford under normal circumstances. Many corporations and individuals take on debt to make large purchases. Hence Debt is an obligation incurred by a borrower to repay certain parties or institutions when loans or lines of credit are used to make large purchases.
In finance, debt is money borrowed by one party (a debtor) from another party (a creditor); the debt is to be repaid by a certain date, usually with interest. The debt is created when the borrower gives the lender a promissory note to that effect.
When one party borrows money from another, an account is created for the borrowing party. One special case is when you receive credit from a business or don’t pay the business immediately and have to make the payment later, you are called a Sundry Debtor or a Delinquent Debtor. Click here to know more.
Whether you are using a GST late fee calculator or looking for funds for your business, it is advisable that you learn about the different types of debt.
So here is a detailed explanation of the 4 different types of debt:
A secured debt is a type of debt that is collateralized by some form of physical asset. The debtor pledges to repay the loan using the collateral as security. The benefit of this is that if the debtor defaults on the loan, the creditor has a right to take possession of and sell the asset. A “mortgage” is an example of a secured debt instrument. Tying debt to specific assets makes sense because it reduces risk to both parties involved in the transaction. The debtor will be less likely to default on payments given that their assets are at stake. Creditors can take comfort in knowing they will get paid back should the worst-case scenario happen and the debtor defaults on payments.
Unsecured debt is debt in which a borrower does not pledge any collateral for repayment. The entire loan is based on the strength of the borrower’s credit standing or creditworthiness.
A common form of unsecured debt is credit card debt. Though this can be paid off at any time without penalty, it often carries very high-interest rates and is thus very risky for consumers to carry over long periods. The high-interest rates associated with this type of borrowing make it easy for consumers to get into more debt than they can afford to repay given their current income level. Read more about Top Ways to Reduce Tax Debts.
Revolving debt is a type of credit wherein a borrower can use funds up to a certain amount, pay it back, and borrow up to that amount again.
Revolving debt is issued by banks and other financial institutions. They offer revolving lines of credit, which are considered loans. Revolving debt usually comes with an interest rate attached to it. Consumers can use the revolving line of credit in various ways, such as obtaining a cash advance through an ATM or using the funds to pay bills
A mortgage is a type of loan in which the property bought with the loan itself acts as collateral. If you default on your mortgage, the lender may be able to take your home as payment for the loan. An advantage of having a mortgage is that it offers you some flexibility when you need it.