Let's start with What is DEBT? and then we'll break it down.
I got this definition from Wikipedia
Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in most cases, plus interest.
So what does this mean in human terms?
Let's say that you have $100, and you really want to buy a $150 pair of shoes. You have a few options, you can:
- Save the additional money ($50) and then you can buy the $150 pair of shoes, or
- You can ask someone to borrow $50 dollars with a promise that you will pay them back in a few weeks when you have the additional $50, and you will also treat them to lunch for "helping you out"
So let's break down the definition above:
- asset: $150 pair of shoes
- future purchasing power: the $50 you will have in a few weeks that you don't have now
- creditor: the "someone" you are asking to borrow the $50 from
- debtor: well that would be you, the person who is borrowing the money
- interest: in the scenario above, let's just say that the "lunch for helping out" is interest, or "payment" for their trouble and trusting you to pay them back. They granted you the $50 with the expectation that they would be paid back.
So now that we have the basics, my next posts will get a little more sophisticated and explain more terms:
- secured vs. unsecured
- interest calculations
- principal
- term
- payment types
- etc
Read along....before you know it you will be an expert on debt, then we can move on to other stuff.
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