Public and Private Debt
Debt is money borrowed from a person, financial institution, or entity. People borrow to invest, cover their ongoing expenses, or buy consumer goods. Corporations and small and medium-sized businesses also borrow to invest or make large purchases. Debt is usually repaid within a specified period, and the borrower owes interest. The interest rate depends on the type of financial instrument, i.e. a payday loan, credit card, student loan, business loan, mortgage, etc.
There are different types of financial instruments, but debt can be grouped into public (government) and private, bilateral and syndicated, and unsecured and secured. Secured debt is a loan that is secured by the provision of collateral. There are different types of secured debt, including mortgage and secured loans. Other types include repossession, foreclosure, and non-recourse loans.
Mortgage Loans
They are easy to understand. The house to be purchased serves as collateral. If the borrower defaults, the financial institution repossesses the property. Non-recourse loans are another variety whereby the borrower can pledge stocks, real estate, jewelry, or vehicle as collateral. Borrowers are not personally liable while the loan itself is used to finance projects with fluctuating revenue and considerable capital expenditures. A foreclosure is a type of secured debt whereby the collateral is resold in case of default. Unsecured debt can be in the form of unsecured personal or business loans, student loans, credit card debt, line of credit, and so on. Unsecured loans are also called signature, character, and good faith loans. The promise and signature of the borrower serve as collateral. These types of loans carry a higher risk for creditors because they don’t involve collateral such as a house, vehicle, or another valuable. Therefore, borrowers pay a higher interest rate.
Credit Card
This is a type of unsecured loan that cardholders use as a form or system of payment. There are different types of credit cards, including prepaid, cashback, travel, and business credit cards. Cardholders who use rewards credit cards earn bonus points that can be exchanged for travel, accommodation, gift certificates, etc. Cashback credit cards are another variety that earns money on card purchases. Cardholders who pay their balance in full find these cards beneficial. The cashback rate varies from one issuer to another and depends on the item purchased. Such cards pay at a rate of 1 to 5 percent. The 5 percent cashback rate applies to items purchased at gas stations, pharmacies, and grocery stores. Business credit cards come with a larger credit limit and offer many advantages, including perks and insurance covers.
Syndicated and Bilateral Loans
There is a difference between them. A bilateral loan is a type of borrowing instrument, and it is offered by a single financial institution. A syndicated loan, on the other hand, is offered by multiple lenders. A bilateral loan is usually smaller than the syndicated variety, making it a cheaper borrowing instrument. With syndicated loans, multiple lenders combine funds, and the borrower pays a high fee. The reason is that financial institutions face a higher risk.
Public and Private Debt
Debt can be divided into public and private. The former is also known as national and government debt. This is money that your government owes. Governments use different financial instruments to borrow, including bills, government bonds, and securities. They borrow from different financial institutions and international and supranational organizations. There are many reasons why governments borrow, one being political pressures. States also borrow when tax revenues decrease, which is the case in times of recession. They need money to invest in different public sector projects such as building highways, roads, medical facilities, and public schools. The goal is to boost economic growth to increase productivity. Governments borrow because it is cheap. Financial instruments such as bonds offer a low rate of interest.
In addition, debt can be divided into good and bad. Money borrowed to pay for vacations or luxury vehicles is considered bad debt. It affects the borrower’s financial situation in a negative way and is often the result of poor budgeting and money management skills. Mortgages and student loans are two types that are justifiable and are considered good debt.
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