Debt 101 - What is Debt

Explore the meaning of debt in finance, its types and fundamental aspects, and the various advantages and disadvantages that debt offers.
Personal Loan
3 min
20-April-2024

Debt is a financial tool that touches nearly everyone's lives, offering access to resources that may not be immediately available. Whether it's borrowing from friends, obtaining personal loans, or using credit cards, debt can shape our financial journeys. In this article, we'll explore the fundamentals of debt, its various forms, and strategies for managing it effectively. Additionally, we'll introduce Bajaj Finance Limited as a reliable partner offering personal loans to help individuals navigate any tricky financial situations.

What is debt

In simple terms, debt refers to money borrowed by one party from another with the promise of repayment, usually with interest. It’s essentially an obligation to repay borrowed funds over time.

Types of debt

  • Secured debt
    Secured debt is backed by collateral, such as a home or a car. If the borrower fails to repay the loan, the lender can seize the collateral to recover their losses.
  • Unsecured debt
    Unlike secured debt, unsecured debt isn’t backed by collateral. Credit cards and personal loans are common examples of unsecured debt. Lenders rely on the borrower’s creditworthiness to determine eligibility and interest rates.
  • Revolving debt
    Revolving debt allows borrowers to repeatedly borrow and repay funds up to a certain credit limit. Credit cards are a prime example of revolving debt, where users can borrow up to their credit limit and repay it as they use it.
  • Instalment debt
    Instalment debt involves borrowing a fixed amount of money and repaying it in equal instalments over a predetermined period. Mortgages and car loans are typical examples of instalment debt.

Common forms of debt

  • Mortgage debt
    A mortgage is a loan used to purchase a home. The property serves as collateral, and the borrower makes monthly payments over the loan term, typically spanning several decades.
  • Personal loan debt
    Personal loans provide a lump sum of money for various purposes, such as debt consolidation, home improvements, or unexpected expenses. These loans typically have fixed interest rates and repayment terms.
  • Student loan debt
    Student loans are used to finance higher education expenses. They come with various repayment plans and interest rates, often subsidised by the government.
  • Credit card debt
    Credit card debt occurs when cardholders carry a balance on their cards beyond the grace period. High-interest rates can quickly accumulate, making it challenging to pay off.
  • Auto loan debt
    Auto loans are used to purchase vehicles. Similar to mortgages, the vehicle acts as collateral, and borrowers make monthly payments until the loan is repaid.
  • Business debt
    Business debt encompasses loans and credit lines used to fund business operations, purchase inventory, or expand operations. Business owners are personally liable for some types of business debt.

Good debt vs. bad debt: What’s the difference?

While all debt involves borrowing money, it's essential to differentiate between good debt and bad debt. Good debt, such as mortgages and student loans, can generate long-term value, while bad debt, like high-interest credit card debt, can hinder financial progress.

Conclusion

Debt management is a crucial aspect of financial well-being, and Bajaj Finance Limited is committed to empowering individuals to navigate their debt responsibly. Whether through secured or unsecured personal loans, Bajaj Finance Limited offers transparent, flexible, and accessible financing solutions tailored to borrowers' needs.

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Frequently asked questions

What is the difference between debt and loans?
Debt is a broader term that refers to the amount of money owed by one party to another. It can include various forms of borrowing, such as loans, credit card balances, and mortgages. Loans, on the other hand, specifically refer to a sum of money borrowed by an individual or entity from another party, usually with an agreement for repayment with interest.
What is a debt consolidation loan?
A debt consolidation loan is a type of loan that combines multiple debts into a single, larger loan. This can simplify repayment by combining all debts into one monthly payment, often with a lower interest rate than the individual debts.
What is an example of a lender?
An example of a lender is an NBFC such as Bajaj Finance Limited that provides a personal loan to an individual. The institution lends the funds to the individual, who then repays the loan amount, along with interest, over the agreed-upon term.
What is collateralisation?
Collateralisation refers to the process of providing collateral, such as assets or property, to secure a loan. If the borrower fails to repay the loan, the lender can seize the collateral to recover the amount owed. Collateralisation reduces the risk for lenders, which can lead to lower interest rates for borrowers.
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