Overview
Debt is a fundamental concept in economics and finance, referring to an amount of money borrowed by one party from another. It involves a contractual obligation to repay the borrowed sum, typically with interest, over a specific period. These repayment conditions are known as the loan terms, which include the principal amount, interest rate, and loan duration.
The borrower, or debtor, can be an individual, business, or government. The lender, or creditor, might be a bank, financial institution, or another entity with excess funds. Borrowed funds allow the borrower to make large purchases or investments that may not be affordable upfront or to manage short-term cash flow needs.
Debt can take many forms, such as bank loans, credit card balances, mortgages, or bonds issued by corporations and governments. Some debts, like mortgages and car loans, are secured by collateral—meaning the lender can seize the asset if the borrower defaults. Others, such as credit card debt and student loans, are unsecured.
While debt can be a powerful financial tool, it also involves risk. Failure to repay a debt can lead to negative consequences, including damage to the borrower’s credit score, loss of assets, or legal action. As such, responsible debt management is essential for maintaining financial stability.
In macroeconomics, sovereign debt refers to the money a government owes to domestic and international creditors. This type of debt significantly influences a nation’s economy, impacting inflation, interest rates, fiscal policies, and public services. Although high national debt can pose economic risks, when managed prudently, it can also support investment and long-term growth.
