most people see debt as the modern-day financial disease especially as borrowing is becoming
increasingly easier while that in itself might be true it is also important to know that debt can
be a helpful tool towards achieving financial freedom meaning it can be either a tool for
disaster or success in today's video we're going to gain a better understanding of debt how you can
leverage debt plus its drawbacks in order to help you make informed decision here are the areas
we'll cover in this topic number one what is debt number two good debt versus bad debt number three
understanding collateral number four types of debt and number five pros and cons of debt remember to
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make further videos let's Dive In number one what is debt, debt is an amount of money that is owed by
one party mainly the borrower to another party the creditor usually debt comes in the form of a loan
but it can also be in the form of bonds mortgages or other financial instruments
debt is typically incurred when a borrower needs to borrow money to pay for something such as a
house a car or a business venture. The borrower is then required to pay back the loan plus interest to the Creditor
over a specified period of time the terms of the debt including the interest rate and the repayment
schedule are typically outlined in a contract called a loan agreement good debt versus bad
debt a good debt is a debt that is incurred to purchase something that will provide value over
the long term and potentially increase in value a bad debt is a debt that is incurred to purchase
something that will not provide value over the long term and it's not likely to increase in value
good debts are typically considered Investments as they have the potential to generate income
or increase in value over time examples of good debts include a mortgage on a home that
is expected to appreciate in value a student loan to finance an education that would lead to higher
paying job opportunities or a loan to start a business that is expected to be profitable
bad debts on the other hand are typically considered expenses as they do not generate
income or increase in value over time examples of bad debts include credit card debt used to
finance consumption a car loan used to purchase a vehicle that is rapidly
depreciating in value or a personal loan used to finance a vacation or other Leisure activity
it's important to know that what is considered a good debt or a bad debt can vary depending on
an individual circumstances and priorities for example a mortgage on a rental property could
be considered a good debt if the rental income generated covers the cost of the mortgage and
generates a profit while it could be considered a bad debt if the rental income is insufficient
to cover the mortgage and the property is not expected to appreciate in value similarly a
student loan can be considered a good debt if it leads to a higher paying job and the loan can be
paid off in a reasonable amount of time while it could be considered about that if the education
does not lead to higher paying job opportunities and the loan takes a long time to pay off
understanding collateral, collateral is an asset or property that a borrower promises to A lender in
case of default on the loan it is viewed as a way to protect the lender from losses if the borrower
fails to make payments collateral can be anything from Real Estate to equipments or vehicles to cash
Etc when a borrower puts up collateral it is a sign of good faith that the borrower will pay
back the loan if a borrower defaults on the loan then the lender can seize the collateral and liquidate it
to recoup their losses. Types of debts, debts can come in many different forms and each type of
death has its advantages and disadvantages they can be classified as secured debts unsecured debts
revolving and mortgage debts secured debts these types of debts require collateral to be granted
the lender uses the collateral as a weight to protect their investment a common example of
this would be a home loan where the home serves as collateral in case of default
as a result secure loans often have lower interest rates longer repayment terms and more flexible
payment options because of this, secured loans are often seen as the most favorable type of debt
two unsecured debts, unsecured debts do not require collateral and are often reffered
to as signature loans to get this type of loan the borrower must have a good credit score and the
lender will use this to determine if they approve the loan unsecured debts often come with higher
interest rates and shorter repayment terms due to lack of collateral these types of loans can
be more difficult to obtain but they often have the most flexibility when it comes to repayment
a good example of this is a personal loan which is unsecured and typically has a high interest rate
three revolving Debs revolving debts are lines of credit that can be assessed and used over and over
again this means that the borrower can use the available credit as needed within a predetermined
limit the interest is often accrued on the remaining balance until it is paid off in full
a common example of this is a credit card which the user can use to purchase items and then
make payments on the outstanding balance this type of debt is often seen as one of the more
expensive options due to the high interest rate and fees associated with it they also
have the advantage of being more flexible and allowing borrowers to make payments over time
four mortgage debts a mortgage is a long-term loan used to purchase property
this type of debt is secured by the property itself and typically has the longest repayment
terms out of all the different types a mortgage is often seen as one of the best ways to build credit
and can be used to purchase a home or other real estate because it gives the borrower more time to
pay off the loan usually between 15 to 30 years the interest rates on a mortgage are often lower
than other types of loans but the repayment terms can vary greatly depending on the lender this type
of debt is often seen as a great investment since it can help build equity over time
pros and cons of debts having debt can be a good and bad thing on one hand it allows people to make
purchases that they couldn't otherwise afford without taking out the loan on the other hand
it can also be difficult to manage as it accrues higher interest rates which can make it hard to
pay off the pros of taking on loan or debt include access to Capital that you never had
the ability to make large purchases that would otherwise, be unaffordable the capacity to
extend payments over a long period access to better interest rates for those with good credit
the possibility to accumulate equity over time the cons of taking on debt include
accruing expensive interest rates accumulating large amounts of debt having to manage multiple
loan repayments at once potentially having to use collateral which could be lost in case of default
in summary, debt can be a great tool for those who need access to Capital that they
wouldn't otherwise have however without a proper understanding of how money and debt work, it could be
a recipe for disaster thank you guys for watching and I will see you in my next video bye for now