7/29/2014

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What Is Debt?
By John M. Roberts

Debt is an obligation to repay money or other assets that have been borrowed, but debt doesn’t always have to be money owed.  It may be payment owed for goods that have already been delivered, or for the payment of services that have already been performed.  The debt is usually the principal amount that is owed but there may also be other charges added such as taxes, interest, insurance, and late fees.    

Debt is usually created in agreement between two or more parties and is normally slated to be paid back at a later time or date.  The person doing the lending is called the creditor or lender and the person receiving the loan, goods, or services is called the debtor.  Debt may range in amounts from as little as a few dollars to millions or more depending on who is doing the borrowing and who is doing the lending.

Usually, when a person takes on debt, he or she and the creditor enters into an agreement in which money or other items of value exchanges hands and arrangements are made for the debt to be repaid.  There are usually contracts, written or verbal, that are expected to be fulfilled.  The severity of the contract depends largely on the circumstances surrounding the agreement made between parties involved.

Most people, especially those who accumulate assets, live most of their lives in debt.  A mortgage for a home, farm, ranch, rental property, or other purchases that run into the hundreds of thousands of dollars usually take 15, 20, to 30 years to pay off.  This is considered long term debt and many real properties are never paid off in full.  People borrow money on them to remodel, add swimming pools, put on new roofs, and do other upgrades to their property.  

A loan for a car, truck, farm equipment, livestock, boat, or RV, may take 5 to 10 years or longer to repay.  Big ticket items in the home such as refrigerators, television sets, bedroom sets, living room furniture, and dining room sets may take 4 to 5 years or longer to pay off and most people never buy everything at once so it may take many years to furnish a home, especially a large one.

Credit cards have become the debt of choice for many people.  It is estimated that the average household in the United States owe $15,000 or more in credit card debt.  They are relatively easy to get and many credit card companies will issue cards to people who don’t have stellar credit.

Another source of debt that is hurting many people relates to getting a higher education.  Many college students are burdened with loans that will take them many years to repay.  It has been reported that student debt averages around $30,000 and in many cases, much more.  Even after graduating from college, many students can’t find the jobs they thought they would get and the burden becomes heavier as the years go by.  Many simply can’t afford to repay their loans, yet, it is still debt and the loans are expected to be repaid.  Like any other debt, a student loan will be put on your credit report.  If it is not paid as agreed, it will have a negative impact and cause your credit score to go down.

Not all debt is bad.  As a matter of fact, most debt is good and if you manage it properly, it can help you immensely.

 

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