Debt

Debt is the state of owning money or other assets to somebody else. Examples of debt are credit card debt, mortgage debt, bonds, personal loans, and lines of credit. The debt is effectively created when consumer, business or a government borrows money or other assets from a lender. The debt must then be repaid according to the credit agreement. The lender also charges interest on the loan, which has to be paid back along with the loan principal. One of the simplest forms of debt is money loan. Another debt for are bonds, which are securities issued by corporations and governments.

Most debts can be classified into different categories – personal/consumer debt, public debt, government debt etc. Both consumer debt and government debt has exploded in the most Western countries in recent years, which resulted in several bubbles, most notably the real estate bubble.

Debt has become all too common in the lives of millions of people all around the world. No one wants it. No one seems to be able to get rid of it. What does it mean to be in debt? Being in debt simply means that you have an obligation to pay a certain sum to a creditor. A creditor can be your mortgage company, a department store, your electric company or your Aunt Betty.

Now if debt is intrinsically a bad thing, why are so many Canadians in such deep debt? In our society, almost everyone lives beyond their means. That is, they want things they can't afford. Everyone wants the latest HDTV or they want a new car. Rather than save up for a few years and pay cash, they can "get it now" by getting a loan. In the long run, you'll wind up paying a lot more than the purchase price as high interest rates on the loan will quickly compound the principal on the loan. There certainly are many examples of debt that simply are unavoidable. Having no insurance, falling ill and being hospitalized will surely put you in debt.

The use of debt can work in a positive manner. Being able to finance purchases and go in to debt allows much more commerce to take place. For big ticket items like cars and furniture, sales would drop precipitously if customers could not pay over time. This was a big problem not too long ago when new car buyers could not find financing. How many sales will a Dealer lose because the potential buyer of the vehicle is unable to come up with the financing?

The stock market would not be what it is today if money could not be borrowed (in the form of a margin account) to purchase more stock than you otherwise could afford. With a margin account, you can buy more stock by borrowing against the assets in your account. For example a person inclined to take big risks might open a margin account. He then buys a thousand shares of XYZ company, laying out half and borrowing the rest. If the stock moves in his favour, he can quickly sell, pay back his margin and pocket a nice profit.

What happens if you get in to too much debt? Well, if you can't pay your bills, you may start to get nasty letters and phone calls from a collection agency. Don't be intimidated. Debt collectors count on fear and try to scare you in to paying what you don't have. If you have a financial crisis, do not panic. Remember debt is only borrowed money. It is not a matter of life and death. Money should not be at the top of any one's list.

Using debt wisely is critical to your financial health. Try not to spend more than you can afford. Make more than minimum payments. Most of all, have getting out of debt as your goal.