Debt

Introduction'

Debt is spending your future wages before you have actually earned them!

A mortgage is a form of debt, but there are other forms e.g. credit cards and car loans. Typically a debtor will agree to borrow money, over a fixed period of time, and to repay both the borrowed money and the interest due.

A debtor can take the form of a person, company or a Government

What can go wrong?

Several factors can affect the ability of the debtor to repay the borrowed money and interest due. For people such factors can be redundancy, rising interest rates, increased taxation and inflation. For Governments such factors can be rising interest rates and reduced tax receipts (caused be a recession).

Short of bankruptcy, it is rare that debts are wholly or partially forgiven. If the borrower fails to pay then the lendor can apply for them to be declared bankrupt. The lendor can use a debt collection agency to seize goods to the value of the of the outstanding debt e.g. they can take your car, plasma TV and even evict you from your home. It is reported that such debt collection agencies can resort to intimidation and/or violence to recover the money!

Countries can also go bankrupt! Contary to popular belief this status is not soley reserved for tin pot South African regimes! In fact any country whose Government is reckless can go bankrupt. The last Labour government did just this - in 1976 the then Prime Minister Jim Callaghan had to borrow from the governments "lender of last resort" the International Monetary Fund (IMF). Thus it seems U.K. governments are more likely to go bankrupt than there is to be a run on a bank!

Risk

The lendor always expects to get their money back. To help ensure this the lendor will assess the risk of your failing to pay back the money. If the risk is low then the interest rates will also be low. However, if the risk is high then either a penal rate of interest will be applied to the loan or the lendor will refuse to advance the money to you.

Quotes

  • Slight was the thing I bought, Small was the debt I thought, Poor was the loan at best; God! but the interest! - Paul Laurnce Dunbar, The Debt (1903)
  • Debt is the hardest task master of them all! - Unknown

See also:-

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right Cartoon that appeared in the Daily Telegraph after the run on the Northern Rock Bank