4/23/2017

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Debt Information

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Understanding Debt

Debt is defined as “the state of owing something” or “that, which is owed.” In most cases this is money.

A person who borrows money for one reason or another and has to pay the money back is called a debtor while the person who lends the money is known as a creditor.

When it comes to assets, debt is a means whereby purchasing power is borrowed from the future to be of use in the present. 

Either individuals or corporations can incur debt. In the case of big corporations, debt is sometimes, but not always, used as a subsection of the complete finance strategy laid out by the executives of the company.

Before a debt is incurred an agreement must be reached by the debtor and creditor about how the debt is to be repaid. This is referred to as the standard of deferred payment.

Most often the payment is a sum of money that will be paid out on a weekly, bi-weekly or monthly basis to the creditor.

In some cases, the debt is repaid by way of goods. In some cases, payments are made in small increments over an allotment of time that is decided upon by both parties. In other cases the debt or loan can be paid all at once at the end of a specified period of time, such as when you defer a payment for furniture at a store for a period of six months.

There is more than one type of debt. The most common types of debt include the basic loan, the syndicated loan, the bond and the promissory note.

Debt can sometimes takes the shape of large sums and in that case can be secured by way of a mortgage or some other form of security interest such as a property that is owned by the debtor, whether it be a car, a boat, land, a house, etc.

In this case if the debtor defaults on the loan then the creditor will be able to take possession of the debtor’s property or at least a portion of it.

A basic loan is an agreement that is made for a principal amount of money to be lent to the debtor for a fixed span of time and is to be paid back by a specified time.

A syndicated loan, on the other hand, is a type of loan that is given to corporations or companies who wish to borrow large sums of money that go well beyond the money that an average person can qualify to borrow.

A bond is a type of debt security that is issued either by governments or companies. Bonds require repayment of the principal with interest added onto it.

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