Debt is also a part of financial literacy. So in the financial literacy for beginners series we will discuss the debt and its key terminologies and types. So let’s start our article, “a beginners guide on debt”.
What is debt
Any sum of money that you owe someone else is, in essence, debt. However, there are a lot more details you should be aware of before you take out a loan.It is ideal for you to fully comprehend debt, from its fundamental concepts and jargon to the long-term consequences it may have on your capacity to accumulate wealth.
Debt terminology
The important debt terminologies are the following;
The principal: This is the total sum borrowed initially, plus interest, and/or the total sum owed at any given time during the loan term.
Rate of Interest: The amount that you must pay over and above the principal on your debt, shown as a percentage (for example, 4.79%). It is known as the interest rate.
There are two types of interest rates;
Fixed interest rate: it is one that won’t fluctuate over the course of your loan.
Variable interest rate: It is one that may fluctuate over the course of your loan. Collateral is a valuable asset that a lender can use to recover the money borrowed in the event that a borrower defaults on a loan and does not repay the loan according to the terms agreed upon. For instance, the lender may seize the car you bought and sell it to another party to recoup the money you borrowed and failed to repay if you take out a loan to buy one and you don’t make the payments.
Types of debts
There are the following types of debts;
Secured debt: A secured debt is one that is taken out to buy a specific asset that will typically be used as security.For instance, the house itself will be used as collateral when you take out a loan to purchase a home.In this manner, the lender can take back the house and sell it to recover the money you borrowed if you ever don’t pay back the loan.
Unsecured debt: Debt without collateral is known as unsecured debt. A credit card is an excellent illustration of unsecured debt.
To safeguard the lender, you are granted access to a restricted sum of money, which you can thereafter borrow and spend without providing any collateral.
