Debt

What is debt?

The word "debt" comes from the old French word "Dette," which denotes an obligation. Debt is the total amount of money that one person owes to another. At either a constant or a fluctuating interest rate, an individual or an institution lends money to another. Therefore, during the loan payback period, the borrower has to pay back both the principal and interest amount.

Example of debt: Mortgage loans, vehicle loans, and debt from credit cards are common debts that people and households have.

What are the different types of debt?

1. Secured Debt

   The primary characteristic of a secured debt is the pledge of collateral by the borrower. If the borrower doesn't pay back the loan, the lender may take possession of this asset. Loans can be secured by a variety of assets, like real estate, automobiles, machinery, stocks, and cash.

   Examples of common secured loans are as follows:
   • Mortgages
   • Loans for vehicles, boats, and recreational vehicles
   • Both home debt and lines of credit



2. Unsecured Debt

   Unsecured debt refers to funds borrowed without security. Lenders cannot use the existence of security or collateral to lower risk and give themselves confidence that they will be paid when dealing with unsecured debts. Instead, to determine whether to offer an unsecured loan, lenders often consider a debtor's creditworthiness.

   Examples of common unsecured loans are as follows:
   • Student loan
   • Personal loans
   • Healthcare bills

How to manage your debt effectively?

Paying back your debt can sometimes feel overwhelming. Check out these pointers to learn about simple actions you can take right away to help manage your debt.

• Understand your debt-to-income ratio (DTI)

  When granting new debt, lenders consider the ratio of your debt load against your monthly income. The collective amount that you pay against your debt must be a bigger burden on your finances.

• Pay all bills timely

  Your credit score is 35 percent based on your payment history. If you've forgotten to make a payment, please do it right away; it will help. If you are late with payments, your credit reports will reflect that. You can set up auto debit on your account to avoid late penalties.

• Pay higher than the bare minimum

  Try to always pay more than what is required. This aids in debt repayment more quickly reduces interest and could raise your credit score. Your monthly EMI is the minimum amount that you are obliged to pay but, you can also choose to pay more than that amount to repay your loan amount in advance or lower your EMI burden.

• Be eligible for lower rates

  Check your current debts to see if you are eligible for reduced interest rates, particularly if your credit has changed for the better or if rates have decreased since you first applied.