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What is Debt?
Nowadays, under normal circumstances, debt needs to be repaid with an amount of interest. The interest rate is normally fixed by the creditor when the contract is made.
Long Term Debt
The long-term debts are those liabilities, whose tenure exceeds one year. These are usually accompanied by interest. In the United Kingdom the long-term debts are also called “long term loans”. For example, bonds and notes, with more than one year maturity.
Short Term Debt
A short-term debt is a liability that has to be paid off by the respective debtor within a time period of an year.
It is included in the current liabilities of a company. An example of the short-term debt is the loan that is borrowed from the banks. It plays an important role in valuating the financial health of a company.
There are different modes of debt repayment. Debt repayment is normally done through cash or goods. Debt repayment is an extremely important part of debts. Prior to debt settlement the debtor and the creditor determine the various terms and conditions of debt repayment.
The terms of debt vary with regard to the time of repayment. Sometimes the debtor pays off his debt at regular intervals of time. In other occasions, he may pay it at one go. In such cases, the repayment is made at the end of the term period of the debt.
Debt to Income Ratio
A debt to income ratio is primarily a certain percentage of the income of a debtor that is used by the debtor to pay off the debts. There are two kinds of debt to income ratio - the front ratio and the back ratio.
The front ratio is used in order to denote the expenses incurred in the various types of housing costs. This ratio is applied to both homeowners and the people who rent their homes.
The back ratio is normally used to point at the expenses that are being incurred to pay off the various outstanding dues.
Types of Debt
Debt can be both – Secured and Unsecured.
- Secured Debts -
The secured debts are those debts, which are provided by the creditor against a property of the debtor. In this type of debt the creditor provides the debtor with a big amount of money. However, if the debtor is unable to repay the debt according to the terms that had been fixed before the loan was provided then the creditor can take away the particular property that had been pledged against the loan.
- Unsecured Debts -
The unsecured debts are those where the debtor does not attach any property against the debt amount.
Use of Debt
As described above, debt is an important concept in the modern business world. Nowadays, a number of business entities especially the companies and corporations regard debt to be an important part of the business strategies followed by them.