Understanding The Various Forms of Debt

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People borrow money in a bid to fulfill various needs whether big or small, some seek credit to finance the purchase of a home or car some to supplement on their monthly income through credit cards, etc.

Creditors extend credit to borrowers based on conditions pertaining to repayment and other facets that must be agreed upon by both parties. And debtors do not always head to institutional lenders to access the necessary funds, but rather lending also happens between friends and family otherwise known as peer-to-peer lending.

Companies utilize debt to fund expansion or other operational projects and this can come in the form of secured or unsecured loans, private or public debt, syndicated and bilateral debt. Private debt relates to funds extended to a borrower in the form of bank loans, while public debt pertains to those credit instruments accessible via over the counter or exchange channels.

Loans can be repaid over a few months or in some cases over a period of up to 30 years, depending on the size and terms of a particular debt agreement.  In the domain of international trade companies can make use of letters of credit to make payments for goods or services supplied over international boundaries.

Another way of lending comes in the form of bills discounting which is one of the important operational aspects of a number of junior banks. With this particular type of loan, banks adopt the bill originally drawn by the borrower, remit him or her promptly through a discount and in some cases via commissions.

The bill is then forwarded to the borrower’s client precisely on the repayment date, and at the same time the bank also institutes collection measures of the bill.

Overdraft refers to permitted access to funds based on credit advanced by a bank as an amount drawn beyond the available balance, by an account holder literally obtaining cash he/she would otherwise not have. In other words, the account holder is empowered to withdraw more money from the bank, thus owing the financial institution.

Under ordinary circumstances an individual or business organization are only allowed to access the balance accrued as a result of deposits, which does not necessarily leave the account in deficit.

In the event that an overdraft transaction takes place, the total amount withdrawn will naturally be subject to applicable interests. This is on condition the account holder acts accordingly within the confines of the mutual agreement with the financial institution.

However, if any rules to the overdraft agreement are not followed such as exceeding the applicable limits, the bank may be left with no choice but to impose penalties, and normally these are unleashed as inflated interest rates.


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