What is debt?
We all know what debt is, right? It is money owed, usually in the form of a loan. But not all debt is money owed. For example, if you have a credit card, you are probably able to pay it off fairly quickly with interest. But if you have a car loan, you have to be careful because the interest often accumulates over time and can eat up your entire life savings.
There are two basic kinds of debt:
• Cash loans (usually referred to as “unsecured”)
• Debt secured by property (usually referred to as “secured”)
Some people think that a loan secured by property is just like any other kind of loan; it just has an extra layer of protection against default. But remember that cars and houses can be repossessed for taxes or lack of insurance and you don’t want to risk having your house used as collateral on an unsecured loan!
The terms “money borrowed” and “money lent” will generally be used in referring to unsecured loans, while “debt” will usually refer to secured loans (or even some unsecured lending) though there are exceptions.
The origins of the word debt
I’ve been working on this topic for a while, and as I’ve come to realize that there are very few things that are easier to explain than what we mean by “debt”, I’m launching a series of posts on it.
I’ll start with the origins of the word. One of the earliest translations of “debt” is “alimony”, which is a divorce settlement between an ex-spouse and their current spouse. It was only after the divorce was final that one party appealed to the court to be allowed to collect alimony from their ex-spouse. The court went through all the arguments it could, and eventually ruled in favour of the former spouse. In this case, it wasn’t clear what kind of payment was appropriate for a divorce settlement (in fact there were still lots of debates about it) so the court thought it would be best if one party paid half and the other paid half.
The original meaning behind “alimony” changed quite a lot over time. Originally, it was used in reference to paying tax — when people had money they had no obligation to pay taxes on their income until they paid them (the idea being that they should contribute back to society). Later on, “alimony” began referring to child support payments (though some people in similar situations may have been paying child support without actually having children). Many years later, money was collected by way of taxes (and then again through child support). Over time this came out as a tax; over time things became more and more complicated until finally debt came into its own: you don’t pay income tax; you pay your debts.
Then we hit another fork in road: creditors started taking debt seriously; governments started taking debt seriously; even banks started taking debt seriously; many companies took debt seriously (especially when they obtained external funding) … eventually we reached informal understanding about how much we owe each other… but nothing official took place, because there isn’t anything official yet – no contract or agreement or anything…
And now? We have something formal: usury laws exist in many countries across Europe and North America (but not all countries do), which means lenders can take up to 50% interest from anyone who defaults on their loan payments. But does anyone think these laws will stop someone from defaulting on their loan payments? Of course
How to pronounce debt
If you have a problem with people pronouncing “debt” as “debtee,” I have some advice for you. When people say “Debt,” they mean “a combination of debt and equity held in the names of two different people, one who owns the debt and one who owns the equity.” So if your friend is borrowing money, he or she is probably talking about equity (i.e., the value of the company).
If you are borrowing money you are probably talking about debt (i.e., equity (or claim on assets) held by a third party that is either being paid back or being put up as collateral). So it is usually best to say:
“What will it take to pay back this loan? What percentage? How much? How long? What happens if I default on this loan? What will happen to my credit rating? How can I get this loan paid back without defaulting on it? Should I make payments or should I write off my debt entirely? Who can make payment on this loan for me and when should I ask them to do so? Which type of payment is most likely to be successful during the entire process and how much will it cost me to make these payments each week over a long period of time?”
The above three sentences sum up what most people mean when they speak about paying back loans, other than saying that it is an amount owed by someone existing as a debtor in a contractual relationship with another entity (or with someone who owes them money; e.g., employees who owe their employer money).
The main differences between saying “what will it take to pay back this loan” and saying “what type of payment is most likely to be successful during the entire process and how much will it cost me to make these payments each week over a long period of time.” are:
1) The first sentence uses mutually exclusive words: It could be any number from zero percent down; however, if you find yourself discussing how much payment might be enough for some reason (e.g., there are no other options), always say zero percent or zero percent down . You don’t need words like possible , because those rarely lead to sound decisions in most situations .
The different types of debt
Traditionally, debt has been associated with consumer goods, wherein you buy a good and pay for it in one payment (interest). But, as we see with so many industries (and as a result, so many people), there are different types of debt.
In finance (as well as in other areas) the terms used to describe this type of debt tend to be:
• Negative amortization: This is when your cost of financing the product is higher than its value to the customer. In our case, this means that if the product is priced at $3k, but the customer pays only $2k upfront and $2.5k on delivery — then you will owe approximately $1k in interest over two years.
• Incremental debt: This type of debt occurs when your costs go up after you have built your product and launch it into the market. In our case, this means that if we charge $2k upfront and then sell it for $1K — we will owe approximately $1.75k in interest over two years.
• Interest-only or “free” financing: This type of financing occurs when you finance your capital growth by issuing shares or credit cards instead of cash (see below for more on this type).
The important distinction here is that you are still paying interest on what was financed with cash (in our case, before there was any revenue), whereas with negative amortization or incremental debt you are actually financing what has already been paid for (in our case both customers’ payments and production costs). And since these payments are made over time, at some point they become interest-bearing (compare this to an installment sale where the balance is due immediately). The most popular form of installment finance today is referred to as a “debt card” — a card which requires monthly payments in return for each new loan.
How to avoid debt
Debt is very much like the B in “bond”. It simply needs to be pronounced as “debt” to avoid sounding like an idiot. Unless you are in some kind of public service or religious work, you probably don’t need any special reasons to pronounce this word as “debt”.
It’s also a lot like the C in “cage”, where it just needs to be pronounced without any special stress on the first syllable to avoid sounding like an idiot. But there are some differences:
• The C and D are usually pronounced with the same emphasis (harder if you pronounce them with a slight diphthong).
• The D is generally shorter than the C; that is why it sounds more idiomatic when pronounced with a slight diphthong (it sounds closer to what we do when speaking of an animal being locked up).
• The D may sound more similar to the G in “goat” than the E in “egg”, but you can still say it with a slight accent on one syllable (or vice versa), so long as you pronounce it correctly.
And lastly, if your company uses a code word for debt, such as “payback period” or something similar, then say it as “payback period, please!” or use some other form of polite acknowledgement instead of using that specific word altogether.
Conclusion
Debt is the type of actual, physical, physical-means-of-transferring-money. It is not a formal legal document or agreement. It’s a financial instrument (and it always has been). The most common way to figure out how much you owe is to look at your monthly payment. This can be done by looking at your bank account (credit score) or by calculating the payments on your credit card.
But there are two problems with this approach: first, in many cases the monthly payment doesn’t even cover the interest that accrued while you were waiting for them to pay off the debt; and second, it’s just not really that useful as a way of figuring out how much debt you have because:
• Most people don’t understand what debt is; they just assume it means “credit card debt” and assume they can pay it off with cash when they come in late; or
• They assume that paying down their credit card debt when they do come in late will actually help them repay their existing credit card debt from years past when they didn’t pay any money on time — which doesn’t happen very often — but rather only helps them keep track of exactly how much money their credit card companies are taking from them for interest every month.
So instead of thinking about how much actual money you owe, instead think about what it means to be indebted to anyone who owes you money. And then think why we should care about paying off our debts?
In most cases, we don’t pay back debts because we owe us too much of something valuable that no one else would want enough of to pay us back: even if we could walk away from our debts as soon as we found a way to make a profit, we’d prefer not to actually do so because:
• We’d have nothing left for ourselves; and
• We know if we do walk away from our debts as soon as possible, but then again if we were forced into doing this we would probably end up bankrupt anyway.
(Some people might argue that this is less important than the latter two points because most people don’t take their debts very seriously anyway.) But there’s an important lesson here regardless: no one owes us anything! Our creditors are us — not somebody else. We can’t pay back our debts without paying ourselves first — so let’s take care of that first! That