What is the Debt?

Everyone is carrying some debt these days. Many of us use debt to finance the purchase of a new home, a car, acquire goods and services, or invest in education.  

Every time when you purchase with your credit card, you ‘borrow’ money from your credit card company.  Sometimes people use their credits card for purchases or bill payments for convenience, sometimes they use credit cards to pay the sudden expense and in emergency situations, but very often most of us use them to make purchases that we could not afford at that time and in normal circumstances.

Borrowing money for whatever purpose, means we are going into debt.  Borrowing money is not always a bad thing as in some situations having the debt can be beneficial for us in the long-run and can help us to reach financial goals.  Especially when we consider the two greatest costs that most of us have faced in our lifetime – buying a home and funding our education. 

Debt is just an instrument that allows us to spend money we haven’t yet earned now, with the expectation that we will pay it back in the future, and allows us to make purchases that we could not afford at the present time or in normal circumstances. Debt is a means of using anticipated income and future purchasing power in the present before it has been earned.

Common types of debt owed by individuals and households include mortgage loans, car loans and leases, credit card debt, income taxes, personal and home equity lines of credit, student loans, payday loan and other secured and unsecured loans from banks and other institutions, business loans and unpaid bills.  

Household debt is defined as the combined debt of all people in a household.

Debt owed by individuals and households is called personal debt and further, it is classified as consumers and personal investment debt.

Consumer debt is a result of purchasing goods and services used for personal consumption and include credit card debts, student loans, auto loans, personal loans or line of credit and payday loans.

Personal investment debt is home mortgages as used for investments in residential real estate.

A certain amount of personal debt is necessary to afford any kind of large purchase and if properly managed and used wisely, your personal debt can be a great asset to you. 

However, there are consequences for falling too much into personal debt, such as increasing interest payments that can cause us to fall even deeper into debt. High amounts of personal debt can increase the strain on your current income by making it more difficult to maintain regular payment of your debts and bills. If your personal debt is not properly managed, it can lead to debt problems and even bankruptcy.