By understanding the meaning of debt, it will be easier to get rid of it and avoid it in the future.
If you are living a debt-free life, you are one of the few lucky people, but the truth is that somewhere in our lifetime, most of us would have to deal with loans which is the result of emergency or unexpected financial requirements.
The definition of a loan can be described as: An amount of money that is borrowed by a person (usually called the debtor) from another person or organization (the creditor).
Another way to look at it is: an amount of money owed to an organization (or in some cases, an individual).
Normally when you get finance, there are various terms and conditions that you must agree upon.
These usually include things like:
- The time period you have to repay the money.
- The interest rate that will be charged and,
- the amount that is payable, usually on the same time every month.
Why would you get finance just to end up in debt?
The answer is very simple, and a good example of understanding debt is through cash loans.
Let’s say you get a loan to renovate that outdated bathroom that has been a sore eye since you bought the house – this might seem like a brilliant idea now, but one thing you must remember is, that you are going to be paying interest on the loan, which means that in the end you are going to be paying back much more than you actually borrowed. This might make you think twice.
Is it really worth the debt?
You should always think of the future and the consequences of your money spending ways.
It is very important that you understand the different types of debt.
Debt can be from secured or unsecured loans.
1. Secured loans
Secured debt can include a car loan and even a home loan / home mortgage. When you take out a secure loan, you usually use your car or home in this case as collateral.
This means that if you fail to make the payments, the lender can claim your vehicle or house as payment.
2. Unsecured loans
An unsecured loan is the much safer one, since there is no collateral involved.
Examples of unsecured loans are credit cards, personal loans, telephone bills etc…
If you are in a difficult financial situation where you are struggling with debt, it might be time to look for strategies on how to manage and get rid of debt, and if it is really bad there are experts that could help you. These experts work as debt counsellors.
The number one rule to remember when it comes to spending is – if you don’t need it, do not buy it.
It's too easy to spend money.
When you want something and that is the biggest problem, especially if you have multiple accounts, because if you keep on spending it will eventually happen so, that not even your monthly income will be enough to cover all your debt, and that will lead to you not making your payments on time and the end result is you ending up with a bad credit record.