What is debt? Many people don’t really understand what it means. When it comes to personal finance, debt is when you owe money, to anyone, for any reason. In general, the definition of debt is that you owe something.
That’s the easiest way to define debt in simple words.
And if you’re curious about how to pronounce debt, the b is silent so it’s det. (Rhymes with bet.)
What Happens When You Owe Money?
When you are in debt, you have to make regular payments to the person or company that you owe. This can be difficult if your finances are tight, but it’s important to try and stay on top of things so they don’t spiral out of control.
Examples of Debt
There are many examples that relate to personal finance.
And with 15.84 trillion trillion worth of household debt out there the first quarter of 2022, it’s safe to say that a lot of Americans owe money.
Here are a few examples:
- using credit cards
- car loans
- student loans
- medical debt
- home equity lines of credit
- personal loans
- money you borrow from friends or family
- business debt
- payday loans
- car title loans
These can be grouped into different types of debt.
Of course, countries, governments, and businesses borrow money as well. That means they are in debt too. Governments often raise money by selling bonds. The bonds are a kind of investment that usually pay interest.
Advantages and Disadvantages
The advantages and disadvantages are pretty simple. The main advantage to debt is that it allows you to get something you need or want right away. There are more disadvantages though:
- You have to pay it back
- It costs you money
- There’s an opportunity cost, so you may not be able to do other things because of what you owe
- It’s risky
- Depending on how much you owe, it can feel overwhelming
If you are thinking of using debt, be sure you would be ok with it if things go wrong. (And if you’re struggling to get out, check these resources.)
The Difference Between Debt and Debit
People often write debit when they mean debt, and vice versa. But the difference between debt and debit is simple: debt is money that you owe and have to repay. Debit means subtracting.
That’s why a debit card takes money out of your account when you use it. But using a credit card means you are taking on debt.
The Difference Between Debt and a Loan Agreement
If you take out a loan, you are in debt. But not all debts require a written loan.
For example, if you borrow $5 from a coworker, that’s debt and someone has lent you money. But it’s probably not a written loan. (But you should still pay it back!)
A loan is something that someone lends, expecting that they will be repaid.
It’s an agreement between the borrower and the lender that often requires a credit check. The agreement spells out what is being lent, when and how it should be paid back, how much payments will be, and how much interest will be charged, if any. Loans are usually formal signed written agreements.
Where Does the Word Debt Come From?
If you’re curious about the etymology of debt, the word comes from the Latin word “debere” which means “owe”.
That makes a lot of sense, since when you’re in debt, you owe.
The Bottom Line
Simply put, debt means that you owe something to someone. Personal finance-wise, that something is money. Be sure to stay on top of what you owe by making regular payments, and if you’re having trouble, seek out help from a financial advisor.