What is a Loan?
Before we start talking about what debt is, we have to learn what a loan is. A loan is when you have to borrow money from a 3rd party to pay for an item. Loans can be secured, which means that the borrower puts up collateral such as a home or car, or unsecured, which means that the borrower does not have to put up collateral but may be required to pay a higher interest rate. Some common types of loans include mortgage loans, car loans, and personal loans. The terms of a loan, such as the interest rate and repayment period, are typically agreed upon by the borrower and the lender.
What is Debt?
Debt is caused by spending more money than what you have. For example, someone might borrow money from a lender to buy a house or a car. With a loan the borrowed money must be paid back, plus a little extra for each period not paid, this is called interest. People will also give collateral, which is an item that is used as security for a loan. So, if I give my house as collateral, and I do not payback the lender’s loan, they take the house.
Personal finance will teach you lessons to avoid getting into debt. Many people acquire debt, but it is important to plan accordingly, and to pay it off ASAP!
What is Credit Score?
A credit score ranges from 300 to 850 and is a numerical rating of a person's likelihood to repay a debt. If you’re looking to get a loan a credit score will be used to determine the likeliness that you will pay it back. The higher your score, the higher your chances are to get a loan! A score of 610-640 is required to get a personal loan. You can get a high score by paying your bills on time. A score can always change, remember if a score is poor it can always change to a good score, with timely bill payments.
What Happens if a Loan is not Paid Back?
If a loan isn’t repaid, there can be serious consequences. One of the biggest risks is that the lender can take legal action to recover their money. This might mean they can claim some of your assets, like your car or other property, to cover the unpaid debt. Additionally, your credit score will drop, making it harder to borrow money in the future or get approved for things like rental agreements or utilities.
Unpaid loans can lead to more financial trouble down the road, including higher interest rates or having wages garnished, so it’s important to stay on top of payments and work with lenders if you're struggling.