Debt Explained

Debt can take many different forms, from a mortgage to a bank overdraft, and from a loan to a credit card. When it is handled well, it can be a useful tool, but when it grows too large or too fast, debt can become a serious problem. Most people will need to borrow money in some form at some point in their lives, whether it is to cover educational or medical costs, to buy a home or simply to tide them over until they receive their next paycheck. It is possible to use debt wisely as a loan in order to purchase an expensive item such as a house or car immediately rather than having to save up first, as a credit card for convenience while shopping or safety when shopping online, or as an arranged overdraft to provide a safety net for your checking account.

Repaying your debts should be one of your financial priorities. Maintaining debts can be expensive, so you need to clear them before you can start to focus on other aspects of your finances, such as building up your savings. A debt is created when one person or institution lends money to another. The borrower promises to repay what they owe, along with an extra payment of interest that makes the transaction worthwhile for the lender.

If you borrow money then you will usually be required to repay a certain amount every month. Interest will also be charged, usually on a monthly basis. The interest will be added to your debt, increasing the amount that you owe. If you do not repay at least the interest that has accumulated when you make your monthly repayment, then the amount of interest that is charged next month will be larger. This is because interest is charged as a percentage of what you owe. If you have allowed the interest to build up, then you will owe more, so your interest charges will increase. This will make your debt grow faster.

Once you start repaying your debt, it should begin to decline, as long as you are repaying more than the monthly interest charges. If you are only repaying the interest, then the size of the principle or the original amount that you borrowed, will remain the same. The more you repay every month, the faster your debt will be cleared. The longer you take to repay a debt, the more you will actually be required to repay. You should work out your own repayment plan and stick to it, rather than simply assuming that you should just meet the monthly minimum repayments. These are usually designed to keep you repaying your debt for as long as possible.

Having a repayment plan is the key to using debt wisely. Before you borrow any money, you should work out how you are going to repay it, how long it will take you to clear the debt and how much you will have to repay in total, including interest. Only if you are sure that you need to borrow the money that you can cope with the repayments and that you have chosen the best and cheapest form of debt, should you commit to borrowing.

You are in control of your debts, so you should always take an active interest in finding the best ways to repay them. You should always be realistic about how much you are spending and how much you owe. It is important to create a budget that you will be able to stick to and that will enable you to keep your outgoings, including your debt repayments, below your income.