Debt is simply money that is owed to another individual or institution. It arises when there is an agreement that is made between an individual and another or between an individual and an institution to have a credit agreement.
There are various types of debt, such as those for credit cards, mortgages or store accounts.
Secured Debt
This type of debt uses a form of collateral, so you can only borrow from the lender if you have some sort of asset to offer in exchange. If you default on repayments, the creditor has the right to retain your asset and sell it in order to recoup costs.
Unsecured Debt
This type of debt is not secured by any asset. To access the finance you won’t be required to provide any assets as collateral.
Instalment Debt
Also known as fixed debt, this type of debt offers the benefit of having a consistent amount to pay each month. Instalments are not affected by interest rate fluctuations.
Revolving Debt
With this type of debt, your monthly payments aren’t fixed. The lower your balance is, the less you have to pay each month.
Fixed payment term
The loan is set to be paid off by a certain date.
Variable repayment period
There is no set date by when the debt must be repaid.
Good debts
These are debts that help you generate value, such as taking out a mortgage, or borrowing for more education. If taking the debt on means that you will somehow make gains in the future, it can be regarded as a good type of debt.
Bad debts
These debts are used to purchase goods or services that have no lasting value. They are usually debts that carry a high interest rate. Credit cards may be regarded as bad debts.
