Definition
Debt is a financial obligation owed to an individual or a lender based on a written or verbal agreement.
Analysis
Debt is what allows businesses and individuals to afford to buy products, services and assets with the understanding that the obligation will be repaid over a period of time. Lenders charge interest as a means for compensating them for risk of default and for profit.
Debt can be classified in a number of ways. Unsecured debt is bound by a promise to repay. Secured debt is guaranteed by an asset that may be seized in the event of nonpayment.
Additionally, there are installment debts, which designate a fixed payment schedule and a fixed recurring payment amount. Revolving debts allow for consumers to reborrow any available credit on the account.
Debt carries a price, which can be paid in the form of interest and in fees. Some debt is more expensive than others.
Beneficial debt can include a car that allows you to arrive at a job and a home that allows you to build equity. Even a student loan is an investment in human capital, which can allow you to qualify for better paying jobs.
Credit card debt is typically viewed as a bad form of debt, although if used properly they can benefit the user. Finance loans tend to have higher interest costs. Refund anticipation loans (RALs) and payday loans are definitely bad types of debt, since they have exorbitant interest and fees that greatly exceed common sense usury limits.
