What The Debt?

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S E G M E N T S: What is Debt? Understanding Debt! Different Types of Debt

What is D E B T? & Understanding Debt

- Debt is usually money, borrowed by one party from another. Debt is used by many corporations and individuals to make large purchases that they couldn't afford under normal circumstances. ( Investopedia Definition )

- Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. ( Wikipedia Definiton )

- The most common forms of debt are loans, 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.

2. T Y P E S OF D E B T

- There are four main categories of debt. Most debt can be classified as either Secured debt, Unsecured debt, Revolving debt, or a Mortgage.

1. S E C U R E D D E B T 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 cars, houses, boats, securities, and investments. These items are pledged as security and the agreement is created with a lien.

2. U N S E C U R E D D E B T is debt that does not require collateral as security. The creditworthiness and the debtor's ability to repay are reviewed before consideration. Since no collateral is issued, the debtor's credit profile is the primary factor used in determining their Approval.

3. R E V O L V I N G D E B T 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.

4. M O R T G A G E S 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.

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