Debt is an economic term that means a monetary claim. Debt is money you have borrowed from others and must repay.
Defining debt
At its core, debt is a financial obligation incurred when one borrows money, creating a debtor-creditor relationship. The debtor, which can be a person or a business, is the one who has to pay back the borrowed money, while the creditor is the person or organization that provided the loan. This financial agreement usually includes a specific payment schedule and a due date, often with payments due in fixed monthly amounts.
Debtor and creditor
The person or organization that owes money is called the debtor. They are responsible for meeting the repayment terms agreed upon in their financial contract. Conversely, the creditor is the one providing the funds. Creditors can be banks, other financial institutions that offer loans, or companies waiting to be paid for their goods or services.
Types of debt
Debt falls into two main categories: long-term and short-term. Long-term debt includes debts that are due over a period longer than a year, such as bank loans. Short-term debt, on the other hand, needs to be settled within a year and typically includes bills or dues owed to public authorities.
Long term debt
Long-term debt covers financial commitments that extend beyond a year. Commonly, this involves loans from banks where the borrower has an extended timeline to fulfill the payment obligations. It’s important to thoroughly understand the terms and conditions of long-term debt since it can affect your financial health for many years.
Short term debt
Short-term debt consists of financial obligations that must be repaid within a year. This includes accounts payable and dues to governing bodies. Managing short-term debt effectively is key to maintaining cash flow, meeting financial commitments on time, and avoiding financial difficulties.