Reality Bites Part One: A Closer Look on Debt

Debts played a vital role in our society. From mortgages to simple loans, if ever you need to buy food or even rent a car, all you have to do is go to your nearest bank and borrow money or even avail credit cards. Economic times are rough, and many businesses are having struggles on paying debts, even until now.



Debt Used as Capital for Business


Flickr (Niklas Horberg)

Most people see debt as one of the oldest type of financial instruments. Actually, this is one of the easiest ways on how you could get money. Imagine this: You’re short on cash, go to a lender and have your money with you in exchange for something (collateral).

Well as per businesses, if you need to add more capital, you would request a loan from the bank. You should bring all requirements like portfolios and business plans for you to gain their trust and complete your loan process.

The Consequences

Yes, you had successfully borrowed money from the bank and used it for your business, now prepare for the consequences: If you became successful on your business as you earn profits you’ll just pay the bank and all your headaches are gone.

But being delinquent of all these debts will result to big liabilities in your business or other worst case scenarios, like bankruptcy.

Kinds of Debt

There are many classifications of debt which existed over the years, but today we will focus mainly on debts which can be categorized based on time and collateral.

Term debt are debts which must be paid in a certain deadline, this can also be referred to as long-term loan. Term Debts occur when you want to build or repair anything that needs a large sum of money. Loans like this often lasts to 12 months or even years.

While revolving debt are debts which can be paid for a short period of time, and this involves smaller amounts of money. This kind of debt has the resemblance of an ordinary loan, where debt is needed due to unpredictable expenses.

When it comes to collateral, there are secured debt, which can be determined when an item or piece of a property is being used as collateral. This is called secured because the lender knows the thing he/she will claim once debt is not paid. Then the other is unsecured debt, where no property is attached to the debt.

In the second part of this article, we will tackle liens that are filed by lenders once a borrower gets delinquent on paying debts, so stay tuned!

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