What Is Debt

"Rather go to bed without dinner than to rise in debt."

Benjamin Franklin

Debt is the money borrowed from a person (friend, relative, etc.) or an institution (Bank, credit card, etc.) in order to make a purchase that otherwise one is not capable of doing (house, car, laptop, etc) owing to financial limitations.

There are various reasons why people prefer taking a loan: Limited liquidity: In case of insufficient income or savings, a person finds it prudent to take a loan and pay back the amount in installments in order to buy something which he/she otherwise cannot. Immediate gratification: Buying something instantly instead of waiting and saving for it provides a sense of gratification. It's basic consumer psychology. Why wait and save a few bucks when you can get it right now? Maintain liquidity: Sometimes people prefer to keep some liquid cash in the account and rather pay back for purchase in EMIs so that they have a safety net in case of emergency.

There are two type of debts: Secured Debt: This is the type of debt where you pledge collateral in order to secure the loan. For example- Home Loans. When you take a home loan, your property is pledged as collateral with the bank until the loan is paid off. Interest rates on these loans are usually less because it is a low-risk loans for the bank. Even in case of default, the bank can simply auction off your property and collect the money. Unsecured Debt: This is the most dangerous kind of debt you can take. These loans usually do not require collateral. For example- Personal loans, and credit cards. They come with hefty interest rates because they are high-risk loans for the banks. In case of defaults, banks have limited remedies with no collateral to recover the loan. Ironically, this type of loan is usually promoted by institutions are often issued faster than secured loans because of higher margins.