Debt is usually money or any other asset owned by one person (the debtor) to another person (the creditor). In simple terms, it is a due loan granted on certain terms and conditions, mainly with a specific interest rate.
Be it an individual or a whole corporation, loans are used by everyone when they need a sum of money and they cannot afford it under normal circumstances. This loan is supposed to be paid back within the decided time and is usually paid back with interest, thus making it a debt. Debt is then further divided into different types, which have their own rules and regulations and typically depend on the amount of money and conditions.
- Secured debt: This type of loan requires collateral from the debtor to ensure the least risk of fraud. This loan happens with a lien. A lien is a claim of ownership placed on the collateral by the creditor.
- Unsecured debt: This type of loan has no sort of collateral or personal belonging. A few examples of unsecured loans are credit cards, student loans, or personal loans. This type of loan usually asks for a higher interest rate as it is riskier for the lender due to no security from collateral.
- Revolving debt: This debt involves a line of credit (LOC). You can borrow money against a credit line more than once. It usually involves variable interest rates, i.e., different amounts of interest according to the amount credited. You also don’t have to pay a fixed amount per month or year. One of the most significant examples of revolving debt is credit card debt.
- Non-revolving debt: This loan also involves a line of credit (LOC). This credit line cannot be used multiple times. A certain amount is borrowed from a lender and should be paid back under the conditions agreed between the two parties. You can’t ask for different funds once the loan is complete. The debtor is supposed to pay a fixed amount in non-revolving debt, and the interest rates are usually relatively high.
- Mortgages: This type of loan purchases different real estate forms like land and buildings for production and selling, houses or parking lots. These properties act as the collateral themselves under the name mortgage. Types of mortgages include adjustable-rate mortgages and fixed-rate mortgages.
Fixed interest rate debt
- Fixed interest rate debt: This debt includes a stable rate of interest. It means that the interest amount on each payment will remain constant.
Adjustable interest rate debt
Debt recovery occurs when a debtor hasn’t paid their lender back, and the creditor involves a third party to help retrieve their owed money back. The hired party is called a collection service which is helpful in the process of recovering the money. To avoid irrecoverable and bad debts, you can try some effective methods of lending, such as:
- Investing in a debt collection agency. Debt collection agencies collect debt payments and help recover loans from default debtors.
- Researching the debtor’s credit history to avoid fraud and have as few risks as possible. It will also help create the conditions according to the debtor’s financial position.
- Communicate. Communication is critical as this would give the debtor a sense of comfort because the terms will happen with the consent of both parties.
While deciding to get a loan, whether a personal loan consisting of a small amount or a big loan for a corporation, you can consider these different types of debts to determine what kind of loan you will be taking. To discover further what type of interest you would have to pay to plan your future financial decisions.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.