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What is debt

Debt is an economic term that means a monetary claim. Debt is money you have borrowed from others and must repay.

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, often an individual or an entity, is the party obligated to repay the borrowed funds, while the creditor is the entity or person providing the loan. This financial arrangement typically involves a predefined payment plan and a due date, commonly structured as fixed monthly instalments.

Debtor and creditor

In professional terms, the party with the financial obligation is known as the debtor. This individual or entity is responsible for fulfilling the repayment terms outlined in the agreement. On the other side, the creditor, often a bank or a business entity, is the party providing the funds. Creditors can take various forms, including financial institutions extending loans or companies awaiting payment for goods or services provided.

Types of debt

Debt can be categorised into long-term and short-term monetary claims, each with distinct characteristics and repayment timelines. Long-term debt typically involves obligations extending beyond a year, such as loans from financial institutions. Short-term debt, on the other hand, requires repayment within a year and commonly includes accounts payable or amounts owed to public authorities.

Long term debt

Long-term debt encompasses financial commitments with repayment periods extending beyond a year. This category often includes loans from banks or financial institutions, where borrowers undertake extended payment plans. Exploring the terms and conditions of long-term debt is crucial, as it can significantly impact an individual’s or entity’s financial stability over an extended period.

Short term debt

Short-term debt involves monetary claims requiring repayment within a year. This category includes financial obligations like accounts payable and dues owed to public authorities. Effective management of short-term debt is essential to maintaining financial liquidity and ensuring timely fulfilment of obligations, preventing potential financial strain.