What is Debt

Debt describes a certain amount of money that one party owes to another, and it is used often by companies and individuals to make large purchases they cannot yet afford.

The individual or company, known as the debtor, borrowing the money will agree to repay the money at a set later date, usually with interest charges. This interest depends on many factors, including the financial position of the borrower.

Debt is mostly encountered in the following ways:

• mortgages
• auto loans
• credit card debt

The interest that is applied to a loan will vary business-by-business and person-by-person. It is shown as a percentage of the loan and used as an incentive in two ways:

• to ensure that the borrower, or creditor, is paid for taking on the risk to borrow the money
• to provide adequate encouragement for the borrower to pay back the loan in full to limit the interest expense