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Understanding Debt: What You Need to Know

Posted by Revive Financial on Oct 6, 2016 12:00:00 AM

Debt can be a scary topic – especially when we have unpaid credit cards, student loans, mortgages, car payments, and personal loans.

It’s easy to become so overwhelmed that you ignore your debt – not opening letters or checking balances. Debt has a way of making us feel out of control, as though we’re falling into a deeper hole, and that we can’t escape.

Debt is confronting, but there is a way out. The first step is to understand debt – the more you know, the less scary it becomes. This article is to help you understand exactly what debt is, so you can begin to establish your own secure financial situation.

What is Debt?

When you have $100 of your own money in your wallet, you simply have $100. But when that money you have comes from somebody else you have a debt of $100. Debt is a sum of money that is owed. Typically, we don’t have debts with our neighbours; we have debts with financial institutions, i.e. banks.

How is Debt Created?

Debt is created when a bank lends you money. This can be through a home loan, car loan, credit card, etc. The amount that they lend you is your newly acquired debt. It is reasonable to borrow a small amount for personal reasons or a large amount if you’re investing in a growth asset such as a house. People get into debt, and therefore trouble when they’re borrowing to buy more than they can afford – such as an expensive car or using a credit card to buy designer clothing.

What Actions Lead to Debt?

When we purchase something, such as a car, a University tuition, a house, or a new pair of shoes with money that is not our own, we are creating debt for ourselves. The types of debt that households have include credit cards, student loans, car loans, home equity loans, and mortgages. When we buy something that we can’t afford to pay for with our own money, we’re creating debt.

The Problem with Debt

Simply owing the bank money isn’t the problem; we could simply wait until we were in a better financial position to pay them back. The real problem with debt is the interest required to be paid on the debt – we have to pay back debt now or the amount of money we owe will continue growing to an unmanageable amount. This is how debt spirals occur. Once you have more interest to pay than you have income, your financial situation is out of control.

What Will Happen If You Pay Back Your Debt?

If you pay back your debt, you will create many opportunities for yourself. Firstly, you won’t have interest payments to make every month which will give you more disposable income. You can use that money to boost your savings, plan a holiday, or enjoy dinners with your friends.

Furthermore, when you have paid back your debt, your credit rating improves. Combined with saving money for a deposit, you could apply for a home loan. But isn’t that getting into more debt? Yes, it is, but unlike shoes or holidays, a house will appreciate in value – your money will earn you more money rather than your debts costing you more money.

Do You Want to Get Out of Debt?

If you are struggling with debt, we at Revive Financial can help you. We can negotiate with your creditors on your behalf, save you thousands in interest, coordinate repayment plans and make it easier to manage, or we can assist you with filing for bankruptcy.

Topics: Personal Insolvency

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