People say that managing your Debt is one of the biggest financial challenges that they face in this modern-day and age. Since you are here, chances are you are drowning in Debt, or you can also be someone who likes to take a keen interest in financial terms and activities.
So what exactly is Debt? Let us take a closer look at it and try to understand the gravity of this term. Debt is basically an amount of money that is borrowed from one person to the second person for the use of the second person. There are a lot of ways of going into Debt.
In simple words, when you are unable to pay the money upfront, you go into Debt. The borrower is given the permission to pay back the amount of money within a certain period of time and with a certain interest rate. But before proceeding any further, let us understand all the nitty-gritty of Debt.
Things You Need To Know About Debt – DEBT 101
There are a ton of things you need to know about Debt. Since there are a ton of different debts, you need to be aware of them. The most common form of Debt is loans. When you take a loan, you sign an agreement with the borrower that you are going to pay the amount back within a certain date, along with a specific interest rate.
This certain date can be some months or some years, depending on the borrower’s terms and conditions. Since you are here, you must be knowing all the details related to your interest. Interest is put in such a way that makes it easy both for the lender and sender to benefit from it.
How Many Types Of Debts Are There?
There are many categories of Debt. While you are here, apart from knowing what Debt is, you should also know the types of debts.
Secured Debts are the debts that are backed by collateral assets. Okay, so to understand this in simple language. Secured Debt is when the borrower agrees to give up a part of his asset or property in order to take the loan. While providing a secured debt, a credit check is a must.
Secured debts are mainly provided by banks and large financial institutions. Before giving out secured Debt, a credit check becomes necessary as it judges the lender’s credibility to pay back the Debt in full. Under secured Debt, the main agreement is that if the borrower cannot repay the lender at a specific date, then the lender receives the right to seize the collateral.
There are several instances of secured Debt, one such example is that of a car loan. When you buy a car on loan, the finance company reserves the right to seize your car if you do not make timely monthly payments. The finance company then later sells or auctions your car to retrieve the money.
As the name suggests, it is very much the opposite of Unsecured Debt; there is no collateral for unsecured debts. Any financial institution does not provide unsecured debts; the borrower’s people rather provide them. However, if the borrower fails to repay the money on time, the lender has the right to go to court.
However, it is not as easy as it sounds. Financial cases can go very nasty in the court of law; that is why unsecured loans have a higher interest rate.
Some of the major examples of unsecured loans are medical bills, credit card loans.
If you are a customer of an eCommerce website, then you are probably familiar with what a revolving debt is. In revolving Debt the customer is allowed to borrow a certain amount of money per month. In other words, the customer can also make purchases up to a certain limit. The lender or the consumer is allowed to borrow any amount below the amount fixed by the borrower. The consumer is given date in the next month to repay the loan; if he is not able to do so, then bounce charges are implied.
It is not possible that you have not heard about mortgages. Mortgages are probably the most famous form of Debt. It is also the most common type of Debt that people carry. Mortgages are in regards to real estate purchases. When you buy a home, you have to take a mortgage.
In the case of mortgages, the collateral is the home. Mortgages have the lowest interest rate when it comes to debts. The time of paying back mortgage debt is a lot. It is usually somewhere between 15 and 30 years. The time of paying back a mortgage loan is stretched so that it is made easier upon the borrowers to pay the EMIS on a monthly basis.
Frequently Asked Questions on Debt
These are some of the most asked questions by our readers. We thought of answering them in brief.
What Is A Maximum Loan Amount?
The maximum Loan Amount is nothing but the total sum of money a borrower can borrow. The maximum loan amount depends on several factors but mainly on the credibility of the borrower, the source of income of the borrower, and the collateral that he is willing to surrender.
What Are Government-Sponsored Loans?
Government-sponsored loans are loans that come with a few exceptions. While taking a Government-sponsored loan, the borrower does not have to match the criteria of good credibility, income source, etc.
What Is A Hard Inquiry?
A hard inquiry is just your full credit information and your credit score. It is mainly done by the lender before processing any loan application. A hard inquiry is also called a hard pull.
Final Thoughts On Debts
There you go, now you pretty much know everything about Debt. Managing Debt is one of the biggest financial challenges that youngsters are facing these days.
So it is very important for them to know all the little details about Debt so that they can learn to manage their debts better. I hope you have found this article informative and that it has added some value to your life.