What Are the Different Types of Debt?

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Debt has been there since the early times of trading.

It has been proven to be one of the most effective ways of doing business until presently, where debt has been the focus of business by financial institutions. A borrower is granted a sum of money or a line of credit by a financial institution (otherwise known as the lender) which the borrower can use to purchase goods or pay for services that are needed.

Debt is used to delay a borrower’s use of personal money for the purchase or payment of goods and services. This is supported by an agreement with the financial institution to repay the amount with an additional fee also known as an interest rate. A debt may also have other fees that may be paid depending on the terms of the agreement.

Two types of debt that can be classified as follows:

  • Credit (or Open-Ended Debt) – credit is the ability of a customer or credit holder to purchase goods and services that will be paid at a future date. There are different types of credit but the main system of how it works is that the goods and services are being paid by the customer based on a promise to pay later.The material sample of credit are bdo credit cards whereby you can pay for goods you wish to avail of using this credit card.

    A credit most often comes with a credit line which a customer is granted with. The customer cannot spend beyond this credit line unless the financial institution who has granted the credit allows the customer to exceed what has been granted. Credit also grants the customer the to pay on a revolving amount basis where there is no fixed price required on due dates.

  • Loans (or Closed-Ended Debt)– a personal loan in Philippines or closed-ended debt has the same intention as for how the credit works. It is made by a customer or borrower to purchase goods and services. The difference with the first type of debt is that an actual cash amount is granted to the borrower for use of purchases and/or payment of goods and services. These loans are then paid with the fixed amount with a specific term end date. Car loans or mortgage loans can be more advantageous in the sense that it allows the borrower the flexibility to use cash compared to finding a goods or services provider who can actually take credit as a form of payment.

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