Apr
19
Credit cards come with many different offers. One of the fastest growing type of credit cards are low interest credit cards which offer low ongoing interest rates compared to most credit cards on the market. They sound good but are they the right choice for you? Find out here.
A number of credit card companies offer low interest in order to attract customers. Unfortunately, these cards are not suited to all people. At the end of the day, how you use your card determines which one is best for you.
Low interest cards are suitable for those who regularly carry a balance from month to month. For these people, the lower interest rate will reduce the amount of finance charges they pay. Keep in mind, however, that some cards charge a very high annual fee in order to cover up for the low interest making it a must for you read disclosures carefully.
Also, the low interest rate may end if you make a late payment, either on the card itself or on another card. This “universal default” clause, where your rate on one card goes up if you’re late on another, unrelated payment, has come under fire recently, but it’s still in many contracts. If you sign one of those contracts, you could find yourself paying the default interest ratewhich can be s high as 30%instead of the advertised low rate. Your only way out at that point may be to close the account and find another low rate card, if you can.
Low rate cards typically do not offer any “extras”, like air miles, cash back, insurance, or rewards points. If those are important to you, you’ll want to compare offers to see which ones provide the features that matter most to you. Affinity cards that can benefit your alma mater or favorite charity are also available. However, you need to check the annual fees as well as the interest rates. Giving to charity while needing a loan to make your credit card payment doesn’t make much sense.
A low interest rate card would not be very beneficial to you if you are the type who does not carry a balance every month. You’ll want to compare credit cards on the basis of annual fees, grace period (the time between when the statement is prepared and when the payment is due), affinity, or rewards.
However, there are times when a really low interest card makes sense. Can you open one of these cards and invest the money at a higher rate? Zero-percent cards can make sense in this instance if the credit card checks are also charged at zero percent. Read the fine print. Purchases or investments made with the checks sent along with your card are not always at the same interest rate as those made with the plastic itself. And don’t forget, you still need to make the minimum monthly payments on time until you cash in your investment and pay off the credit card.
Low interest credit cards can be quite beneficial for two-thirds of Americans who carry balances. They can utilize that low rate to reduce the total interest charges paid while trying to clear the principal balance.
As things like interest rates can change, you have to regularly compare credit cards and look for the one that would suit your present situation. A number of card issuers operate today, and as long as youy payments are on timeComputer Technology Articles, you have unlimited options should you want to change.
Source: Free Articles from ArticlesFactory.com
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Apr
19
People with bad credit may think that there are no decent bad credit credit cards. In fact, bad credit credit cards exist, but they are not always advertised as such. An individual just needs to recognize how certain cards work and how their bad credit might prevent them from getting these credit cards.
A prepaid credit card is one of the best bad credit credit cards. It works like a credit card, but a prepaid credit card requires a savings account be opened that acts as the account balance. It works very much like a bank issued debit card with a credit card logo. And a person cannot overspend and they are not subject to fees or interest charges with prepaid credit cards.
A retail store card could also be considered as a type of bad credit credit cards. Its easy to get these cards and are useful for those are looking to establish their credit history. However, these cards can only be used at the specific retail store that issued them, and they usually carry a low credit line balance. Companies who offer these cards are more willing to give a person with bad credit a chance than larger credit card companies.
A person with bad credit can also benefit from a gasoline card. These cards work only at gas stations, much like a retail credit card. These cards are also easy to get and report to the major credit bureaus. This means that they build a persons credit so they can qualify for a credit card from one of the major credit card companies.
A person can also find someone who will cosign in order to get bad credit credit cards. Just like with a loan, a co-signer should have good credit. The credit card company considers them as security. If the person does not pay on their account the cosigner agrees to pay the balance due. This may be difficult for a person with bad credit, but once they prove themselves to be trustworthy they should be able to get the cosigner off their account.
Even persons with bad credit can turn things around once they find bad credit credit cards. Of course, they should try to make payments on time, pay off balances and become an ideal credit card holder. This way it will be easier for them to prove their credit worthiness in the future.
Source: Free Articles from ArticlesFactory.com
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Apr
4
Cheapest Home Improvement Loan Options
Filed Under Home Loan | Leave a Comment
Among the various options home improvement loans, the most popular ones include both secured and unsecured loans. Between the two, secured loan is the cheaper option because it is given against collateral and therefore the risk to the lender is negligible. Lender may provider secured home improvement loan of GBP3000 to GBP75000 but for greater loan, he will evaluate equity in the collateral. You can choose repayment period from the range of 5 to 30 years keeping your repayment capacity in mind.
The unsecured home improvement loan is also available at cheap rates because of the high competition prevailing among the lenders in the market. If you require a smaller amount then you need not to put your home at risk as collateral as you can opt for unsecured home improvement loan. Given without collateral, unsecured home improvement loan are a little expensive for the lenders charge higher interest rate. The unsecured loan would be repaid in 5 to 10 years. Lender may ask for documents related to annual income and employment to ensure adequate repayment capacity.
One of the most popular types of home improvement loans is the home equity loan. This is a loan secured by the equity you have available in your home. These types of loans come in the form of a loan or a line of credit. The loan has a fixed interest rate, term, and payment. A home equity loan is best suited for people who know just how much they are going to spend and are going to spend it in a relatively short period of time.
Another type of loan is the home equity line of credit. Under this plan, the lender sanction you a certain amount and the amount you use is left to you discretion. You only pay on the amount that you use. There is usually an annual fee associated with a home equity line of credit. This type of home improvement loan is good for people who are not sure of the amount they want to spend or are going to spend the money over a longer period of time
The costs of home improvement projects can be paid from savings, which is the least expensive option, or by credit or store cards, which are other types of loans. Credit or store cards can be very expensive options if debtors cannot pay on time. Store card interest rates can be as high as 25-30%. Credit cards offer rates of around 15-18%. So these borrowings must be planned with proper care. Personal loans can be another option if it is difficult to plan credit card borrowings.
Larger projects obviously require more money, which may not easily be met from either savings or credit cards. Hence, one must try for other options for raising cash for home improvements, including a further advance on a mortgage, an unsecured loan with flat rate or unsecured loan with variable rate, or a secured loan. Many major improvements are funded in these ways.
Some lenders provide the facility of transferring an existing home improvement loan to a new loan with better interest rate and flexible repayment options. This is also known as refinance of home improvement loan. Some lenders also have insurance cover for their loan through payment protection plan, thereby securing the loan for the borrower and making him stress free from the financial burden.
About the Author
Author recommends to read the home improvement loans for bad credit , conduit loan credit tenant , guaranteed secured loan and logbook loans articles.
Apr
4
When you as a part time student, or previous student, feel that you must time your student loan consolidation in order to get the best possible rate.
Thankfully for the most recent graduates, there is still plenty of time to figure this out. This is because of the fact that congress has made a few recent changes for the year of 2008.
These changes have helped students by lowering the Stafford loan rates so that it is fixed at the low rate of 6.8 percent. For those students who qualify for the subsidized Stafford loans, then your rate would decrease over the course of a few years until the rate of 3.4 percent is reached in the year of 2011.
For students who are beginning their search for student loan consolidations, especially the federal student loan consolidations, it is better to try for the month of May. This is because of an auction that occurs during that last week. It is the United States Treasury Bond Auction and it is held annually during the very last week of May.
Though the bond auction occurs in May, the new interest rates for federal student loans and federal student loan consolidations don’t take effect in until the first of July. Between May and July, lenders have a chance to decide on a lower rate than they are currently consolidating loans for, and, if they feel that it will benefit them, then they lower the fixed interest rate. If they don’t feel that it will be any kind of benefit for them, then they will wait until the new rates will take place in July.
After the auction is over, any student who are looking for student loan consolidations should begin watching the markets as soon as soon as the U.S. Treasury bond auction has ended because that month before the new interest rate is fixed is when the individual loaners will start to drop fixed rates for the student loan consolidations in order to get more business.
There are things to watch out for when you are deciding on any kind of student loan consolidation or any loan consolidations for that matter. There are scams, especially on internet searches. These scams will ask for a fee to be paid upfront, before anything else happens. Even though there are a few specific types of loans that will have a consolidation fees, none will ask for them upfront. When you are looking for your student loan consolidation you will rarely come across anything that asks for fees, because they slightly raise your interest rate to pay for it instead.
When you are looking at federal student loan consolidation, you need to be sure to keep all of your federal student loans together and separated from federal loans. This will allow you to take advantage of offers that you can get from the federal loans that will be ruined if they are grouped with private loans. Remember to time your student loan consolidations for the best benefits and offers you can get.
There are things to watch out for when you are deciding on any kind of student loan consolidation or any loan consolidations for that matter. There are scams, especially on internet searches. These scams will ask for a fee to be paid upfront, before anything else happens. Even though there are a few specific types of loans that will have a consolidation fees, none will ask for them upfront. When you are looking for your student loan consolidation you will rarely come across anything that asks for fees, because they slightly raise your interest rate to pay for it instead.
When you are looking at federal student loan consolidation, you need to be sure to keep all of your federal student loans together and separated from federal loans. This will allow you to take advantage of offers that you can get from the federal loans that will be ruined if they are grouped with private loans. Remember to time your student loan consolidations for the best benefits and offers you can get.
About the Author
School loan consolidation doesn’t have to be a major headache. By doing research on the Internet and using free student loan debt consolidation resources you’ll be able to find a program that will save you money and headaches!
Mar
29
The facts are undeniable. Foreclosures are up to 7.6% from 7.3% of loans past due or in foreclosure. The biggest rise in these numbers relate to what are called sub-prime mortgages. These are mortgages that were sold to lower income families where the original starting payments were set at a reduced rate. When interest rates rose, the borrowers of this type of mortgage were caught out. Instead of having to make a payment that they had been quoted when the mortgage was sold to them, they faced much higher payments in line with the higher interest rate prevailing at the time.
Now its easy to say that this is their own fault and that they should have been more careful when entering into the loan and that the duty of care is on the borrower to ask about the risks involved and the potential downside that a rise in interest rates would cause. The worrying thing is though, that many of these loans were sold to people who were novices in owning their own home and such complicated financial instruments. They came from low income households and were ‘blinded’ by a dream that most of us take for granted.
I am not the only one who thinks so. The Attorney General in Illinois is already investigating Countrywide Financial Corp for its potentially illegal targeting of minority groups for the purchase of high cost loans. This is just one of many State and Federal investigations underway.
Countrywide is also under scrutiny as its CEO Angelo R Mozilo is now being investigated for possible illegal securities transaction in which he cashed nearly $120 million dollars worth of stock shortly before his company announced bad loans of $422 million in the fourth quarter of 2007. Countrywide who are currently being taken over by Bank of America has also been named by the F.B.I. today,(9th March 2008), as one of fourteen lenders being investigated for lending practices.
As with most investment stories, when people are losing money, there is usually someone making it. It emerged in recent days that Warren Buffet may be about to step in to take a stake in Countrywide. Mr Buffet, who recently topped the world list of the richest men on the planet, knocking off Bill Gates after thirteen years, has been sitting on a cash-pile of some $50 billion dollars for some time now. His investment company, Berkshire Hathaway has reported taking a stake in Bank of America recently and rumours abound that he is looking to get involved once again in the financial & mortgage securities markets. As usual, Mr Buffet, your timing is impeccable!
Even ‘The Donald’ could be seen recently on National TV bestowing the virtues of property investment. I have to agree with Mr Trump that those who have the ability to invest in property in a depressed market are possibly the people who will profit the most. For the average man in the street though, I think the message is clear. When taking out a home loan or refinance package, get some professional advice. Check the small print and know the downside before signing the agreement.
About The Author– Rebuild.org are specialist brokers of Mortgages , Home Equity Loans and Refinance packages. Know the market and whats available before committing to any type of financial arrangement.Read more financial articles at KFA Global
Article Source: Articles island – Free article submission and free reprint articles
Dec
18
by rdokoye
There are many car loan calculators available to allow you to determine your monthly payment or even your car purchase price.
‘Buy or lease’ car loan calculators are also available. Such calculators are capable of comparing amounts, and will let you see which the better value is for you.
One limitation of a car loan calculator is that it is not a quote. This is because your actual repayments may change based on your individual circumstances.
The features of a car loan calculator are generally similar. Most car loan calculators allow you to put in the amount of money you would like to loan. Afterwards, you can select how many months you would like to pay it back. Finally, you can click the car loan calculator button and see how it works out how much you will end up paying the finance company. This would, of course, depend on how many months you choose and what their annual percentage rate (APR) is.
A car loan calculator can be offered free on the internet as an Excel Spreadsheet Download Area. It is ready to use. All of them have several loan scenarios on one 8×10 printout, allowing you to make quick decisions about your car loan. You can also find car loan calculators online at E-LOAN and Capital One Auto Finance. If you have a PocketPC type PDA, you can download a version of some car loan calculator for PDA. You can use the spreadsheets to compare online auto loan rates to the car dealer auto loan rates. New car financing has never been easier for you.
Here are some general kinds of car loan calculators and see which works best for your car loan needs.
Free Car Loan Calculator – There are tons of free car loan calculators around, especially on the internet. Remember most of the calculators are just to work out what your ideal monthly payments should be and are NOT a quote. There are free car loan calculator links all over the net.
New Car Loan Calculator – New car loan calculators help you work out your ideal monthly payments. A lot of new car loan calculators can be used for a variety of uses like used car loans. With this calculator, you can usually enter your own interest rate for your loan.
Online Auto Loan Calculator – There’s quite a lot of online car loan calculators out there that you can use and you’ll find links to online auto loan calculators that can hopefully help you find the best deal.
Why are car loan calculators useful? You’ll need to calculate your car loan payments and look up dealer costs for cars and trucks. Without the knowledge you have derived from using a car loan calculator, you could miss out on a good deal. Bank and finance companies could take advantage of your lack of research.
As you try to arrive at how much car you can afford with car loan calculators, don’t think in terms of the monthly payment or just of the total price of the car. The monthly payment, as we’ve seen, can be manipulated just as easily and both approaches leave out other costs associated with the car, such as insurance, fuel and maintenance. To truly understand if you can afford a car, you must take all these factors into consideration. There are ‘how much car can you afford?’ calculators which will help you arrive at a close approximation. They work in the same way as car loan calculators.
There’s still more to do before you actually start shopping for a car of your own. Decide whether you should buy a brand new or a pre-owned vehicle and whether you would be better off buying or leasing. There are pros and cons to both questions. Either way, car loan calculators can speed up your decision.
About the Author
Uchenna Ani-Okoye is an internet marketing advisor and co founder of Free Affiliate Programs
For more information and resource links on auto loans visit: Best Auto Loan Rates
Article Source: Content for Reprint
Dec
18
Bad Credit Ratings
Filed Under Loans Articles | Leave a Comment
by Thomas Champeval
Bad credit loan
One of the most important information a loan company collects about you when you’re taking a loan is your credit rating. A credit rating is a compilation of all the credit reports that the multitude of companies you may have dealt with have about you. Yes, loan companies share details of credit reports. Your credit rating is an important financial data because it ultimately reflects your ability to pay your loans and your debts.
People who have gotten themselves in a bit of debt trouble will often have a hard time taking out a loan. This is unfortunate as a bad credit loan may just be the thing they need to extricate themselves from their financial mess.
Some loan companies, however, are open to the idea of allowing bad credit loan to people with blotched credit records. A bad credit loan, however, is not as appealing as loans that are taken out by a valued and trusted customer.
A bad credit loan offering usually allows a limited amount of money available to the person taking out the loan. Since people with bad credit rating have a history of low performance in terms of debt payment, it is understandable that loan companies limit the amount they make available in a bad credit loan.
Adding to this difficulty is the fact that a bad credit loan usually has a high interest rate because the common lending company steers clear of people with bad credit, companies who offer a bad credit loan offer them for a price.
Because of this, before taking out a bad credit loan, make sure of your ability to pay this loan. If you can keep up with the monthly payments, some companies will reconsider your interest rate. Even if they do not, at least you can improve your credit rating and, hopefully get a better loan arrangement the next time around.
You can choose to take out a bad credit loan either as protected or as unprotected loans. Protected loans are good for the lending company and dangerous for those who will take out the loan. A bad credit loan is essentially a loan allowed to someone who has a low capability of paying for debts. Should they commit the same mistake with a protected bad equity loan, not only will they be in debt but they also will lose the item that served as protection for the bad credit loan. Therefore it is good advice to consider taking out a protected bad credit loan as a last resort or as something you will take out when you are sure of making your monthly payments.
In making a bad credit loan, there is twice as much need to think very carefully of your actions and to seek out the best loan offer around because a bad credit loan is essentially a proof that the one who is borrowing is incapable of making the monthly payments. If there is a very high probability that their effectiveness in paying their debts may yet again happen to their bad credit loan and they may end up losing more than what they bargained for.
About the Author
Thomas Champeval is a writer for http://www.bad-credit–loan.net/, a premier resource in the financial world. Come read about bad credit loan and bad credit rating
Article Source: Content for Reprint
Dec
18
by rdokoye
Are you one of the many people who have loan problems? No need to worry, for you are not alone. Bad credit is not something to be ashamed of. Anyone can end up having it, just like the common cold. After some time and some effort on your part, you can turn a bad credit rating to a better one.
The good news is, even people with bad credit can be financed on bad credit car loans. Once you get there, you need to remember a few things, though, in order to turn your bad credit to the advantage of your bad credit car loan. Remember not to take on a car payment that you truly know in your heart that you can’t afford. Know what you can and cannot afford before talking to a car salesman.
There are many ways by which you can get a bad credit car loan even when you have a bad credit. You need to have sufficient income that can pay up all your bills including additional payment for your bad credit car loan, insurance, accessories, repairs and maintenance costs. A steady and sufficient income could get you that bad credit car loan even if you have a bad credit. Your lender would like to see that you’ve had your current job for at least a year and this could make them overlook your bad credit hence increase chances in approving your bad credit car loan. Try to maintain your address for a while, as well, for this can keep your bad credit at bay and help in the approval of your bad credit car loan.
Having a large down payment will also help in getting your new bad credit car loan. Your down payment will depend on the car model you wish to buy. It could range from hundreds to thousands of dollars.
If you want to have a better chance at having your bad credit car loan approved, you can be a member of a credit union. Even if you have bad credit, you can apply to them for a bad credit car loan. Their credit criteria is often more relaxed compared to banks and finance companies. The longer you have been a member in a credit union, the more positive the response is for your bad credit car loan despite a bad credit rating.
The same thing works for a local bank. Should you have had a previous loan with them, they could still want to take a chance with you on your bad credit car loan. If by any chance you have paid off a previous loan, they could consider your bad credit car loan application even if you have bad credit history in other banks of finance companies.
You could also get a bad credit car loan by having a co-signer. Your co-signer must have good credit rating himself and meet the necessary requirements.
Bad credit will indeed affect your bad credit car loan application, but you can still explore other possibilities. A large volume new car dealer can give you deals you can bank on. Choose your vehicle and come up with a deal. Afterwards, talk with a finance manager who will work with you to get a bad credit car loan despite your bad credit. The trick is to see an aggressive finance manager who will see you through choosing your vehicle, overlooking your bad credit and getting a bad credit car loan soon.
About the Author
Uchenna Ani-Okoye is an internet marketing advisor and co founder of Free Affiliate Programs
For more information and resource links on auto loans visit: Best Auto Loan Rates
Article Source: Content for Reprint
Mar
5
Asset
Filed Under Loan Definition | Leave a Comment
This article is about the business definition. For other uses, see Asset (disambiguation).
In business and accounting, an Asset is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event.
Asset characteristics
Assets have three essential characteristics:
The probable future benefit involves a capacity, singly or in combination with other Assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
The entity can control access to the benefit; and,
The transaction or event giving rise to the entity’s right to, or control of, the benefit has already occurred.
It is not necessary, in the financial accounting sense of the term, for control of Assets to the benefit to be legally enforceable for a resource to be an Asset, provided the entity can control its use by other means.
It is important to understand that in an accounting sense an Asset is not the same as ownership. In accounting, ownership is described by the term “equity,” (see the related term shareholders’ equity). Assets are equal to “equity” plus “liabilities.”
The accounting equation relates Assets, liabilities, and owner’s equity:
Assets = Liabilities + Owners’ Equity,
The accounting equation is the mathematical structure of the balance sheet.
Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., Asset account amounts appear on the left side of a ledger).
Similarly, in economics an Asset is any form in which wealth can be held.
Probably the most accepted accounting definition of Asset is the one used by the International Accounting Standards Board. The following is a quotation from the IFRS Framework: “An Asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”
Assets are formally controlled and managed within larger organizations via the use of Asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical Assets.
Classification of Assets
Assets may be classified in many ways. In a company’s balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.
Current Assets
Main article: Current Asset
Current Assets are cash and other Assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These Assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current Assets:
Cash and cash equivalents — it is the most liquid Asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
Receivables — usually reported as net of allowance for uncollectible accounts.
Inventory — trading these Assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the “lower of cost or market” rule.
Prepaid expenses — these are expenses paid in cash and recorded as Assets before they are used or consumed (a common example is insurance). See also adjusting entries.
The phrase net current Assets (also called working capital) is often used and refers to the total of current Assets less the total of current liabilities.
Long-term investments
Often referred to simply as “investments”. Long-term investments are to be held for many years and are not intended to be disposed in the near future. This group usually consists of four types of investments:
Investments in securities, such as bonds, common stock, or long-term notes.
Investments in fixed Assets not used in operations (e.g., land held for sale).
Investments in special funds (e.g., sinking funds or pension funds).
Investments in subsidiaries or affiliated companies.
Different forms of insurance may also be treated as long term investments.
Fixed Assets
Main article: Fixed Asset
Also referred to as PPE (property, plant, and equipment), or tangible Assets, these are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.
These are also called capital Assets in management accounting.
Intangible Assets
Main article: Intangible Asset
Intangible Assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These Assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.
Some Assets such as websites are treated differently in different countries and may fall under either tangible or intangible Assets.
Other Assets
This section includes a high variety of Assets, most commonly:
Long-term prepaid expenses
Long-term receivables
Intangible Assets (if they represent just a very small fraction of total Assets)
Property held for sales
In a lot of cases this section is too general and broad, because Assets could be classified into four above categories.
Mar
4
Debt
Filed Under Loan Definition | Leave a Comment
Debt is that which is owed; usually referencing assets owed, but the term can cover other
obligations. In the case of assets, Debt is a means of using future purchasing power in the present
before a summation has been earned. Some companies and corporations use Debt as a part of their
overall corporate finance strategy.
A Debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society,
Debt is usually granted with expected repayment; in many cases, plus interest. Historically, Debt
was responsible for the creation of indentured servants.
Payment
Before a Debt can be made, both the debtor and the creditor must agree on the manner in which the
Debt will be repaid, known as the standard of deferred payment. This payment is usually denominated
as a sum of money in units of currency, but can sometimes be denominated in terms of goods. Payment
can be made in increments over a period of time, or all at once at the end of the loan agreement.
Types of Debt
There are numerous types of Debt, including basic loans, syndicated loans, bonds, and promissory
notes. Debt, especially large sums of Debt, can also be secured through a mortgage or other security
interest over some of the debtor’s property, in which case the creditor will have some rights over
that property in the event that the debtor becomes unable to repay the Debt and defaults on the
loan. And it may not work out as it seems
A basic loan is the simplest form of Debt. It consists of an agreement to lend a principal sum for a
fixed period of time, to be repaid by a certain date. In commercial loans interest, calculated as a
percentage of the principal sum per annum, will also have to be paid by that date.
In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid;
the additional principal has the same economic effect as a higher interest rate (see point
(mortgage)).
A syndicated loan is a loan that is granted to companies that wish to borrow more money than any
single lender is prepared to risk in a single loan, usually many millions of dollars. In such a
case, a syndicate of banks can each agree to put forward a portion of the principal sum.
A bond is a Debt security issued by certain institutions such as companies and governments. A bond
entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors
in a marketplace when an institution wishes to borrow money. Bonds have a fixed lifetime, usually a
number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the
bond’s life the money should be repaid in full. Interest may be added to the end payment, or can be
paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in
the bond markets, and are widely used as relatively safe investments in comparison to equity.
Accounting Debt
In national accounting, debts are added according to those who are indebted. Household Debt is the
Debt held by households. “National” or Public Debt is the Debt held by the various governmental
institutions (federal government, states, cities …). Business Debt is the Debt held by businesses.
Financial Debt is the Debt held by the financial sector (from one financial institution to another).
Total Debt is the sum of all those debts, excluding financial Debt to prevent double accounting.
These various types of Debt can be computed in Debt/GDP ratios. Those ratios help to assess the
speed of variations in the indebtness and the size of the Debt due. For example the USA have a high
consumer Debt and a low public Debt, while in eastern European countries, for example, the opposite
tends to be true.
There are differences in the accounting of Debt for private and public agents. If a private agent
promises to pay something later, it has a Debt, and this Debt is enforceable by public agents. If a
public body passes a law stating that it’ll pay something later (a kind of promise), it keeps the
right to change the law later (and not to pay). This is why, for instance, the money governments
promised to pay for retirements does not show up in the public Debt assessment, whereas the money
private companies promised to pay for retirements do.
Securitization
Main article: Securitization
Securitization occurs when a company groups together assets or receivables and sells them in units
to the market through a trust. Any asset with a cash flow can be securitized. The cash flows from
these receivables are used to pay the holders of these units. Companies often do this in order to
remove these assets from their balance sheets and monetize an asset. Although these assets are
“removed” from the balance sheet and are supposed to be the responsibility of the trust, that does
not end the company’s involvement. Often the company maintains a special interest in the trust which
is called an “interest only strip” or “first loss piece”. Any payments from the trust must be made
to regular investors in precedence to this interest. This protects investors from a degree of risk,
making the securitization more attractive. The aforementioned brings into question whether the
assets are truly off balance sheet given the company’s exposure to losses on this interest.
Debt, inflation and the exchange rate
As noted above, Debt is normally denominated in a particular monetary currency, and so changes in
the valuation of that currency can change the effective size of the Debt. This can happen due to
inflation or deflation, so it can happen even though the borrower and the lender are using the same
currency. Thus it is important to agree on standards of deferred payment in advance, so that a
degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to “US
dollar denominated” Debt.
The form of Debt involved in banking accounts for a large proportion of the money in most
industrialized nations (see money and credit money for a discussion of this). There is therefore a
complex relationship between inflation, deflation, the money supply, and Debt. The store of value
represented by the entire economy of the industrialized nation itself, and the state’s ability to
levy tax on it, acts to the foreign holder of Debt as a guarantee of repayment, since industrial
goods are in high demand in many places worldwide.
Inflation indexed Debt
Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and
are used in some countries. For example, the US government issues two types of inflation-indexed
bonds, Treasury Inflation-Protected Securities (TIPS) and I-bonds. These are one of the safest forms
of investment available, since the only major source of risk — that of inflation — is eliminated. A
number of other governments issue similar bonds, and some did so for many years before the US
government.
In countries with consistently high inflation, ordinary borrowings at banks may also be inflation
indexed.
Debt ratings, risk and cancellation
Risk free interest rate
Lendings to stable financial entities such as large companies or governments are often termed “risk
free” or “low risk” and made at a so-called “risk-free interest rate”. This is because the Debt and
interest are highly unlikely to be defaulted. A good example of such risk-free interest is a US
Treasury security – it yields the minimum return available in economics, but investors have the
comfort of the (almost) certain expectation that the US Treasury will not default on its Debt
instruments. A risk-free rate is also commonly used in setting floating interest rates, which are
usually calculated as the risk-free interest rate plus a bonus to the creditor based on the
creditworthiness of the debtor (in other words, the risk of him defaulting and the creditor losing
the Debt). In reality, no lending is truly risk free, but borrowers at the “risk free” rate are
considered the least likely to default.
However, if the real value of a currency changes during the term of the Debt, the purchasing power
of the money repaid may vary considerably from that which was expected at the commencement of the
loan. So from a practical investment point of view, there is still considerable risk attached to
“risk free” or “low risk” lendings. The real value of the money may have changed due to inflation,
or, in the case of a foreign investment, due to exchange rate fluctuations.
The Bank for International Settlements is an organization of central banks that sets rules to define
how much capital banks have to hold against the loans they give out.
Ratings and creditworthiness
Specific bond debts owed by both governments and private corporations is rated by rating agencies,
such as Moody’s, A. M. Best and Standard & Poor’s. The government or company itself will also be
given its own separate rating. These agencies assess the ability of the debtor to honor his
obligations and accordingly give him a credit rating. Moody’s uses the letters Aaa Aa A Baa Ba B Caa
Ca C, where ratings Aa-Caa are qualified by numbers 1-3. Munich Re, for example, currently is rated
Aa3 (as of 2004). S&P and other rating agencies have slightly different systems using capital
letters and +/- qualifiers.
A change in ratings can strongly affect a company, since its cost of refinancing depends on its
creditworthiness. Bonds below Baa/BBB (Moody’s/S&P) are considered junk- or high risk bonds. Their
high risk of default (approximately 1.6% for Ba) is compensated by higher interest payments. Bad
Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to
default on his Debt. These types of Debt are frequently repackaged and sold below face value. Buying
junk bonds is seen as a risky but potentially profitable form of investment.
Cancellation
Short of bankruptcy, it is rare that debts are wholly or partially forgiven. Traditions in some
cultures demand that this be done on a regular (often annual) basis, in order to prevent systemic
inequities between groups in society, or anyone becoming a specialist in holding Debt and coercing
repayment. Under English law, when the creditor is deceived into forgoing payment, this is a crime:
see Theft Act 1978.
International Third World Debt has reached the scale that many economists are convinced that Debt
cancellation is the only way to restore global equity in relations with the developing nations.
Effects of Debt
Debt allows people and organizations to do things that they would otherwise not be able, or allowed,
to do. Commonly, people in industrialized nations use it to purchase houses, cars and many other
things too expensive to buy with cash on hand. Companies also use Debt in many ways to leverage the
investment made in their assets, “levering” the return on their equity. This leverage, the
proportion of Debt to equity, is considered important in determining the riskiness of an investment;
the more Debt per equity, the riskier. For both companies and individuals, this increased risk can
lead to poor results, as the cost of servicing the Debt can grow beyond the ability to pay due to
either external events (income loss) or internal difficulties (poor management of resources).
Excesses in Debt accumulation have been blamed for exacerbating economic problems. For example,
prior to the beginning of the Great Depression Debt/GDP ratio was very high. Economic agents were
heavily indebted. This excess of Debt, equivalent to excessive expectations on future returns,
accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a credit
crunch followed. Deflation effectively made Debt more expensive and, as Fisher explained, this
reinforced deflation again, because, in order to reduce their Debt level, economic agents reduced
their consumption and investment. The reduction in demand reduced business activity and caused
further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased
Debt cost caused by deflation and the reduced demand.
It is possible for some organizations to enter into alternative types of borrowing and repayment
arrangements which will not result in bankruptcy. For example, companies can sometimes convert Debt
that they owe into equity in themselves. In this case, the creditor hopes to regain something
equivalent to the Debt and interest in the form of dividends and capital gains of the borrower. The
“repayments” are therefore proportional to what the borrower earns and so can not in themselves
cause bankruptcy. Once Debt is converted in this way, it is no longer known as Debt.
Arguments against Debt
Some argue against Debt as an instrument and institution, on a personal, family, social, corporate
and governmental level. Islam forbids lending with interest even today, while the Catholic church
allowed it from 1822 onwards, and the Torah states that all debts should be erased every 7 years and
every 50 years.
Debt will increase through time if it is not repaid faster than it grows through interest. This
effect may be termed usury, while the term “usury” in other contexts refers only to an excessive
rate of interest, in excess of a reasonable profit for the risk accepted.
In international legal thought, Odious Debt is Debt that is incurred by a regime for purposes that
do not serve the interest of the state. Such debts are thus considered by this doctrine to be
personal debts of the regime that incurred them and not debts of the state.
Levels and flows
Main article: Debt levels and flows
Global Debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004. It is expected to
rise in the coming years as the spending habits of millions of people worldwide continue the way
they do.