Debt Dictionary: Your Guide to Understanding Debt
Debt is a part of life for most people. From student loans to mortgages, credit cards to medical bills, debt comes in many shapes and sizes. While debt can be a useful financial tool if managed properly, it can also become a huge burden if left unchecked.
That’s why at Delancey Street, we’re dedicated to helping consumers and business owners have a healthy relationship with debt. We want to empower you with knowledge so you can make the best financial decisions for your situation.
What is Debt?
Debt is simply something owed by one party to another, typically money. Some common examples include:
- Credit card balances
- Auto loans
- Student loans
- Personal loans
- Medical debt
When you take on debt, you receive money upfront that you are obligated to pay back over time, often with added interest and fees. Debt allows people to make large purchases they otherwise could not afford.
Types of Debt
There are many different types of debt, each with its own characteristics:
Secured debt is tied to an asset that acts as collateral. Common examples include mortgages and auto loans. If the borrower defaults, the lender can seize the collateral to recover losses.
Unsecured debt does not require collateral. Examples include credit cards, medical debt, and personal loans. With unsecured debt, the lender must rely on the borrower’s creditworthiness.
With revolving debt like credit cards, the borrower can continuously draw, repay, and re-borrow up to a set limit. The balance may fluctuate but generally does not have a fixed payoff date.
Installment debt, like auto loans or mortgages, has a fixed term and requires set payments each month until the balance is paid off.
Short-term debt is designed to be paid off in less than a year, like payday loans or some retail credit accounts.
Long-term debt extends beyond one year. Mortgages are a common example, often lasting 15-30 years.
Debt vs. Credit
Debt and credit are closely related terms that refer to different sides of the borrowing process:
- Debt is the amount of money you owe.
- Credit is the amount you can borrow.
For example, if you have a credit card with a $5,000 limit, you have $5,000 of available credit. If you currently owe $2,000 on that card, your debt is $2,000.
Debt vs. Loan
While often used interchangeably, debt and loans have some key differences:
- Debt is a broad term for anything owed.
- A loan is a specific agreement where a lender provides money that the borrower must repay with interest.
So all loans are debt, but not all debt comes from loans. Debt may also arise from unpaid bills, taxes, court judgments, and more.
The Risks of Debt
Used strategically, debt provides access to major purchases and allows you to build credit. However, debt also comes with considerable risks, including:
- Owing more money than you can realistically repay
- Damaging your credit score if you miss payments
- Accruing interest charges and fees that increase the amount owed
- Potential legal action from lenders
- Bankruptcy in severe cases
That’s why it’s critical to only take on manageable debt that aligns with your budget and long-term goals.
Getting Out of Debt
If you find yourself overwhelmed by debt, here are some strategies to become debt-free:
- Make a budget and free up cash flow to accelerate payments
- Prioritize high-interest debts first
- Consider balance transfer or consolidation loans to lower interest rates
- Avoid taking on new debt during the payoff process
- Contact creditors to negotiate modified payment plans if needed
- Seek credit counseling to create a customized repayment strategy
The path to becoming debt-free takes diligence, but it is possible with commitment. At Delancey Street, our experienced team can provide customized debt relief solutions to fit your unique financial situation. Contact us for a free consultation.
- Debt refers to money owed by one party to another, often with interest.
- Key types of debt include mortgages, credit cards, student loans, and more.
- Secured debt is tied to collateral while unsecured has no backing.
- Revolving debt can be reused, unlike installment debt with fixed payments.
- Debt allows purchases not otherwise affordable but also comes with risks.
- Budgeting, prioritization, consolidation can help you eliminate debt.
Understanding the different forms of debt is key to using it strategically and avoiding pitfalls. Delancey Street is here to help you build a healthy relationship with debt to improve your financial wellbeing. Reach out today to get started.