A debt is created when one party borrows an asset from another and is obligated to repay it in some way, usually according to a pre-arranged agreement, within a specified time frame.
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 to the debt-holder until the debt has been repaid. If the repayment is not made in full, the collateral asset is forfeited. For instance, a car loan typically creates a secured debt. If you still owe money on the car loan and don't make timely payments, the note-holder can confiscate (or repossess) the car and sell it to recoup the money still due.
An unsecured debt is more risky to the debt-holder (the lender), because in the event of non-payment of the debt, the lender has no recourse to forfeited 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 don't make the monthly payments due, the credit card issuer can report the non-payment to the credit-reporting agencies, which will negatively impact your credit score, but they generally can't repossess whatever you bought with the card.
Related Fool Articles
Related Community Blogs
- Auto loan
- Credit card debt
- Debt instrument
- Home equity loan
- Personal loan
- Retirement of debt