What is Debt?
What Is Debt?
Almost everyone owes money ? bills are a fact of life. But sometimes people find they are swamped with debts and can?t see a way of paying them all.
A debt is when a person owes somebody money. There are many different forms of debt some of which are listed below.
If a person is paying off the requested loan amount or clearing their credit cards each month then this doesn?t pose a problem as they are ?managing their debts?.
What starts to cause a problem is when the person is only paying a minimum amount each month to their debts. The companies add interest * each month onto the remaining un-cleared debt and the debt gets bigger and bigger. If the customer is only paying the minimum payment amount this will not even clear the interest owed let alone any capital.
Companies can also add charges and before the customer knows it they cannot afford to make repayments.
The worst thing a person can do is to ignore the problem ? it won?t just go away.
- Interest is an extra charge on the original debt because it has not been cleared in other words they start to charge the customer extra for not repaying the debt in full.
What/Who Is A Debtor?
A ?Debtor? is the person who owes the money to another person/company, i.e. they are in debt to that person.
Anyone can be a debtor from any different lifestyle; even people in well paid jobs can be in debt.
What/Who Is A Creditor?
A ?Creditor? is the person/company that is owed the money.
Different Types of Debts
There are two types of debts Priority and Non Priority.
Priority Debts
Priority debts are debts owed to creditors who can take the strongest legal actions against a customer if they do not pay. It is not the size of the debt that makes it a priority, but what the creditors can do to recover their money.
Examples of Priority debts are:-
- Mortgage arrears - the mortgage lender can take court action for possession of the customers home
- Rent arrears - the landlord can evict the customer if they have rent arrears
- Income tax and VAT ? the customer can be made bankrupt or imprisoned for non-payment of income tax or VAT
- Fines, such as magistrates court fines for traffic offences - If these are not paid, the court can use bailiffs to repossess the customer?s goods. If, after this, they still have arrears unpaid, they can be sent to prison
- Maintenance (CSA), child support or, council tax or rates - If these are not paid, a court can use bailiffs to repossess the customer?s goods. If, after this, they still have arrears unpaid, they can be sent to prison
- Utility debts - if these are not paid, the customer can have their fuel supply disconnected
- Hire purchase - will be a priority debt if it is for an essential item, for example, if the customer has bought a car on HP and needs the car to go to work. The company could come and repossess the vehicle.
Non-priority debts
Examples of non-priority debts are:-
- Credit card and store card arrears
- Catalogue arrears
- Bank overdrafts and loans
- Benefits overpayments
- Hire purchase (sometimes called 'conditional sale') will be a non-priority debt if it is for goods which are not essential to you, for example, a television bought on HP
- Money borrowed from family or friends.
What is APR?
APR stands for the Annual Percentage Rate of charge. It can be used to compare different credit and loan offers. The APR includes important factors such as:
- The interest rate you must pay;
- How you repay the loan; the length of the loan agreement (or term); frequency and timing of instalment payments; and amount of each payment;
- Certain fees associated with the loan; and
- Certain compulsory insurance premiums (for example payment protection insurance).
All lenders have to tell the customer what their APR rate is before the customer signs an agreement. It will vary from lender to lender. Generally, the lower the APR the better the deal is for the customer.
Example 1:
If a customer borrowed ?1,000 for one year at 20% interest, and at the end of the year the customer repaid a lump sum of ?1,200:
- They will be paying an interest rate of 20%; and
- The APR will also be 20%.
Example 2:
If a customer borrowed ?1,000 for one year at 20% interest, and repaid throughout the year in equal monthly instalments (12 x ?100 = ?1,200),
- They will paying an interest rate of 20%; but
- The APR, however, will be roughly 40%.
Example 2 is more expensive because the customer is paying back the ?1,000 gradually throughout the year. In Example 1 the customer has the benefit of being able to access the ?1,200 for the whole year, which you could invest and earn interest on. By paying in instalments the customer is losing out; this increases the cost of the loan - hence the higher APR.
Creditor
Someone you owe money to.
Unsecured lending
Total loan & credit card debts excluding your mortgage and any hire purchase.
Country
The country you currently live in.
Insolvency Practitioners
Also known as an IP, a person who specialises in formal insolvency cases.
Valuations
The process of determing the current value of an asset.
Equity
The difference between the market value of a property and the claims held against it.
Lender
Someone you owe money to.
Eviction Order
A court order by which a person may be evicted.
Arrears
An unpaid and overdue debt.
Disposable Income
The amount of income left to an individual after taxes have been paid, available for spending and saving.
Statement of Affairs
A financial report showing assets and liabilities at expected liquidation values and shareholders' equity.
Insolvent
Unable to meet debt obligations.
Secured Loan
Money borrowed using goods or property as a guarantee.