What Is Debt?
Debt is when an agreement is made with a third party, the lender, to borrow a specific sum or resource now with the intention of repaying the debt to the lender in the future either in installments or in full.
Not all debt is created equal. There are two broad categories that debt falls under secured and unsecured debt.
It is important to know the meaning of each category and which category your debt falls under because it determines who you will pay first. In other words it will show you how to prioritise your debt.
How to measuring your debt to income ratio? Why is it important?
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income.
There is no such thing as a good debt:
My father states that you should have at least maximum a fifth in debt Repayment, given that my problem area us my secured debts and this needs to be tackled ASAP.
I am going follow his path.
I think Robert Kiyosaki described debt as a loaded gun. He can’t be more true, especially heavily indebted the can escalate very quickly.
But the wisest man of them all King Soloman is keen to state in
Proverbs 22:7 that the borrower is slave to the lender.
Last time I checked I was born a free woman, don’t want to put myself in slavery.
Read my plans to become debt free.
Secured and unsecured debts
There are two main categories for debt: secured and unsecured.
Secured debt is where you take out a loan or borrow money against a physical asset such as a property or a car. If you fail to repay the agreed loan, the lender can repossess the asset. Interest rates on secured debt are lower as a result, but they are also riskier for the borrower because the consequences of not paying are more serious. Failure to meet repayments may cost you your home. A good example of a secured debt is a mortgage.
Unsecured debt, like personal loans, don’t involve any assets; instead, you are charged higher interest rates or fees to cover the risk to the lender. If you don’t repay on time or in full you may be charged more interest or fees, and your credit record could be damaged, limiting your ability to borrow in the future.
The cost of many unsecured debts will be promoted with a representative annual percentage rate (APR) which is a percentage figure of how much you’re likely to pay in fees and interest charges for the loan. This varies by borrower, your APR may be higher if, for example, you have a poor credit history. It is good to keep in mind that the representative APR promoted by lenders, only has to be offered to at least 51% of borrowers so that rate isn’t necessarily guaranteed to all.
Good Debt vs. Bad Debt
Spoiler alert: There’s no such thing as good debt. That’s like saying there are good kinds of the flu.