Debt
Written by: Michael Fein // Adapted by: James McGlinchey
What is debt?
Debt is borrowed money used by corporations or individuals to enhance their purchasing power.
Debt involves an agreement between two parties under which the money will be paid back at a later date with interest.
Important Terminology
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Principal
the amount borrowed without including fees and/or interest
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Interest Rate
the proportion of a loan charged as interest, usually expressed as an annual percentage rate (APR) of the loan amount left
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Assets
property owned by a person or a company, parts of which (like cash) can be used to meet debts or other commitments.
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Secured Debt
debt with collateral meaning some other asset can be confiscated if the debt is not paid off (like a house under a mortgage)
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Unsecured Debt
debt without any collateral such as credit card debt, personal or medical loans.
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Credit Report/Score
a report of credit history and utilization to let lenders know how creditworthy a borrower is.
Types of Debt
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Credit Card Debt
Unsecured, revolving debt typically with some minimum payment at the end of the month and high APRs.
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Student Loans
Unsecured installment debt with flexible terms used to pay for schooling.
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Mortgages
Secured installment loans with a home as collateral, if you stop making payments the lender can seize property through foreclosure.
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Auto Loans
Secured installment loan with a car as collateral, a car can be repossessed if payments are not given.
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Medical Debt
Unsecured debt with payment plans specific to hospital billing office.
Can I afford this loan?
How to calculate monthly payment amounts.
Gather Information
Note the interest rate of the loan, the size of the down payment, the term of the loan, closing costs, any other fees.
Size the Loan.
Subtract the size of the down payment from the sale value of the home to get the size of the mortgage loan.
Monthly In.
Divide the interest rate by 12 to obtain the monthly interest rate and multiply the term length by 12 to obtain the number of payments or installments.
Plug & Chug!
Use the above formula to find your monthly payment!