We all hear a lot about debt whether it’s from debt consolidation companies, our banks or our friends and relatives who perhaps are struggling with it themselves. It seems everyone these days has debt whether it’s your average Joe, large corporations or even countries… but what is debt? And what does it mean?
Essentially the easiest way to answer the question ‘what is debt’ is to describe it as an amount that an individual or organisation owes to a lender. When we are in someone’s debt it means that they have done something for us and we need to repay them, and we often use this in a colloquial manner when someone does us a favour. However in finance that debt refers to money, and we will usually owe this to an organisation such as a bank or a mortgage company. In this situation that loan will normally come with interest and that will mean that the debt grows over time and this is how the loan companies make their money. To those businesses we are an investment in much the same way you might put your money into stocks and shares, a property, or a savings account, they are giving the money to individuals and letting it grow thanks to the interest. In fact that’s a lot of what banks actually do with your money when you do put it in a savings account and the interest you make comes from the debt other people owe the banks for their business loans and mortgages.
People often then find themselves in trouble as a result of this however – as the longer they take to pay their debt back the more it grows. In some cases they then have to sell off their homes or have their belongings repossessed in order to pay back their loans – which is why it is important to only take out loans that you can pay back, and why debt management is so crucial. Ask someone struggling with their loans ‘what is debt’ and they’ll be far too familiar with the concept.
That’s a basic answer to the question of what is debt, but precisely what it means from person to person will vary greatly and there are many reasons that we might take out a loan. Of course the most recognised form of debt is our mortgage and this is what gives us the capital to buy properties. At the same time though we might take out bank loans in order to start companies, to buy cars or motorcycles, to pay off other debts, to go on holiday, to fund weddings and events and much more. Even our credit on our credit cards is a form of debt and represents a miniature loan from your bank. On a larger scale countries also have debt and this represents how much money they owe other countries. The concept of what is debt then is a complicated one and one that can be answered in many ways, but by asking ‘what is debt’ you are one step closer to understanding it and managing it.