Debt

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Debt is what someone owes to someone else. Usually, debt is in the form of money, but it can also be items, favors, or other things.

Types of debt[change | edit source]

Goods, services or money borrowed with the intent of repayment (in kind or not) creates a debt. Debt can be secured or unsecured in nature.

A secured debt involves the use of collateral, which is an asset that is obligated (promised) to the debt-holder until the debt has been repaid. If the repayment is not made in full, the lender gets the collateral asset. For instance, a car loan typically creates a secured debt. If you still owe money on the car loan and do not make timely payments, the note-holder can take back (or repossess) the car and sell it to get the money still due. A home mortgage is similar.

An unsecured debt is more risky to the debt-holder (the lender, also called creditor), because in the event of non-payment of the debt, the lender cannot take assets to help defray the loss incurred by not receiving the expected payment(s). Credit card debt is typically unsecured. If you charge items to a credit card and do not make the monthly payments, the credit card issuer can report the non-payment to the credit-reporting agencies. That will reduce your credit score so others won't lend, but they generally cannot repossess whatever you bought with the card.