Understanding Debt
- Author Sarah Russell
- Published August 15, 2007
- Word count 560
On the surface, managing money seems like a pretty simple thing. You earn money, whether through a job, inheritance or lottery winnings; and you spend it on the things you need (or think you need). It sounds so simple, until you introduce debt into the picture. If you fail to live within your means and your expenses exceed your earnings, you’ll quickly find that there are ways to borrow money to make up for this disparity.
Debt is really a simple concept – when you borrow money from another for whatever reason, you are in debt. And unless you’re borrowing from a very generous friend, you’ll be required to pay back that debt at some point in time. Banks, credit card companies and other credit providers are unlikely to be as lenient. When you take on a debt, you’ll find that it comes with terms and conditions that govern its repayment, including the deadlines for making payments and details on your interest rate.
Understanding interest rates can get tricky with all the financial jargon of APR rates, compounding interest and so on. But on a simple level, interest is what the creditor charges to let you have access to all that money. After all, banks and credit companies aren’t just friendly businesses there to help you out – their for-profit enterprises. In exchange for loaning you money, they expect to be paid back a certain percentage (your interest rate) on top of the original loan amount (called your principal). That’s why it’s so important to shop around to get the best interest rate possible – a small percentage of a big debt can be a lot of money!
One of the most common instruments of debt comes in the form of a loan. A loan can either be secured to unsecured. If you have any assets, such as a house or a car, you may pledge these items as “collateral” to get a loan, meaning that you’ll turn over these assets to the credit issuer if you can’t pay back your loan for any reason. This is referred to as a secured loan, since the creditor has a measure of security that they’ll get their investment back. A loan is considered unsecured when the debtor does not pledge specific assets to the creditor as collateral.
Clearly, a secured loan is a safer choice for credit issuers. Often times, debtors who are able to secure their loans find better terms and interest rates, since the creditor has a means of collecting on any defaulted loan. However, having an unsecured loan doesn't mean that the debtor can renege on his or her debts. If a debtor fails to pay back the loans, the creditor can still file a case in court, requiring the debtor who has no cash to sell some of his assets to pay back the outstanding loan.
While debt can sound scary, there’s nothing to worry about if you use it wisely. Building good credit from an early age by using debt responsibly can make a huge difference in the long run. But the temptation is always there to purchase more than you can afford to. It’s easy to get in over your head – so take the time to learn more about your finances and be smart about your money!
This article was published by Sarah Russell on Smart Young Money – a collection of money management resources for teens and young adults. For great information on using credit, managing debt and more for young people, visit www.smartyoungmoney.com.
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- Non resident Mortgages in Spain
- Effective Strategies for Paying Off Your Mortgage Faster
- How Does Equity Release Work?
- Florida First Time Homebuyer: The Indispensable Guide of Tips, Programs, and Resources
- How to Become Debit Free?
- Sellers Concession the Closing Cost Option
- Financing Short Term rentals with DSCR loans
- Why move to Roseville CA
- Simple Interest Mortgage Advantage
- Are Low Doc Commercial Loans available in Australia
- How to Obtain a Rural Agriculture Loan Quickly and Easily
- What is a Caveat Loan?
- Tips for improving your Credit Score before getting a Home Loan
- 3 Things To Look out for With An Equity Release Mortgage
- Manage your Debts by Refinancing your Current Home Loan
- How to Get a Home Loan with Unusual Employment or Income?
- 20 Effective Debt Consolidation Loans Tips with Bad Credit
- Tips for Choosing a Non Conforming Lender
- Why is a Good Credit Rating Important in Australia?
- Most Common Ways That People Fall Into Personal Bankruptcy
- How to Choose a Consumer Credit Counseling Agency?
- Consolidate Your Debts and Take Control of Your Finances
- How to get a Home Loan due to a Bad Credit Report
- Debt Consolidation Home Loans are a Solution to Multiple Debt Problems
- Facts You Should Know About Low Doc Home Loans in Australia
- No Doc Loans from Private Lenders
- Home Loans to Consolidate Debt for People with Bad Credit
- How Can I Get a Mortgage If I Have a Bad Credit History?
- Guidelines to Fix Bad Credit Effectively Through Dispute
- Dealing with Debt – What to know about Debt Consolidation