What is Debt?
Debt can be loosely described as something that is owed. In financial terms, debt occurs when a lender (creditor) transfers money or extends credit to a borrower (debtor) but does not receive immediate repayment (settlement).
In the explanation above, debts are generated when a creditor lends money to a debtor, in return for repayment with interest over an agreed period.
Prior to a debt being created, the creditor and debtor agree the terms of the debt. This agreement will include:
- The currency of the debt
- The interest on the debt
- The debt repayment schedule
- The term of the debt
- The collateral used by the debtor to safeguard the creditor.
Types of Debt
There are many types of financial debt. These include:
- Credit cards
- Consumer credit agreements