What are debts?

Debt explained in under 5 minutes
By: Latoya Erby

Definition of Debt and Examples

Debt is money that one entity – an individual, company, organization, or government – owes to another entity. When you borrow money, you typically agree with the lender to repay the amount on a schedule, which may include interest or fees. People are often familiar with common types of debt such as credit cards, auto loans, student loans, and mortgages.

Good Debt vs. Bad Debt

Although all debt comes at a cost, any borrowed amount can generally be classified as good debt or bad debt based on how it affects your financial situation and life. Good debt helps to increase your income or build wealth. Bad debt, on the other hand, does not provide much benefit or does not yield gains that offset what you pay.

How Does Debt Work?

People take on debt because they need (or want) to buy something that costs more than they can pay for in cash. In some cases, people may want to use their money for something else, so they borrow money to cover a specific purchase.
Some types of debt may be designated for specific purposes only. For example, a mortgage loan is used to purchase real estate, and student loans cover education costs. For these types of debt, the borrower does not receive the money directly; rather, the funds go to the person or institution providing the goods or services. In the case of mortgage loans, for instance, the seller or the seller’s bank receives the money.

Types of Debt

Consumer debt is generally categorized into secured and unsecured debt. Within these categories, there are usually recurring debt and installment debt.

Secured Debt

Secured debt gives the lender the right to seize a specific collateral if you default on the obligation. Secured debt generally includes mortgage loans, auto loans, and secured credit cards.

Unsecured Debt

On the other hand, unsecured debt is not tied to collateral and does not automatically give lenders the right to take your property if you fail to meet your obligation. Examples of unsecured debt include unsecured credit cards, student loans, medical bills, and payday loans.

References:

– Center for Responsible Lending. “Map of U.S. Payday Interest Rates.”

Source: https://www.thebalancemoney.com/what-is-debt-5119120