Debt

Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.

The English term "debt" was first used in the late 13th century and comes by way of Old French from the Latin verb debere, "to owe; to have from someone else.

Principal is the amount of money originally invested or loaned, on which basis interest and returns are calculated.

For individuals, debt is a means of using anticipated income and future purchasing power in the present before it has actually been earned.

Commonly, people in industrialized nations use consumer debt to purchase houses, cars and other things too expensive to buy with cash on hand.

[9] The less transparent or further away from cash the form of payment employed is, the less an individual feels the "pain of paying" and thus is likely to spend more.

Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond.

Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another.

They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.)

[citation needed] In executing a transaction, letters of credit incorporate functions common to giros and traveler's cheque.

[14][15] Upon obtaining the borrowed loan, those within the receiving end are then generally enabled to have a greater cash flow, resulting from lowering monthly payments, if not reducing interest rates.

[16] However, this varies from every claimant, in that their own eligibility for such is entirely dependent on their own overall circumstances;[17][18] Should they meet specific requirements, being able to afford such, their requests are usually accepted; Should they fail the criteria, they're almost always swiftly rejected, regardless of their financial ability.

[19] Given the often monetary hardship of contenders, those providing these loans often charge at larger rates of interest than others;[20] This is often critiqued by its opponents,[21] who claim that it is an unfair practice aimed at targeting those who are desperate and often holds arbitrary figures,[22] although those in its defence claim it is a security measure aimed at ensuring its repayment obligations and must take precautions before offering large sums.

[23] Both arguments have resulted in greater debate amongst legislators in different nations, amidst demands for further regulation and more decreases in lending restrictions.

Debt consolidation has also been an area of interest for loan sharks, leaving those heavily indebted vulnerable to extortionate rates.

The idea behind debt consolidation is occasionally a matter of debate in the financial and institutional sectors, often ranging between analysts towards professors, generally concerning ethics involved in different areas.

[24][25][26][27] Companies also use debt in many ways for capital expenditures and other business investments produced in their assets, "leveraging" the return on their equity.

In finance, the theoretical "risk-free interest rate" is often approximated by practitioners by using the current yield of a Treasury of the same duration.

This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due.

Unsecured debt comprises financial obligations for which creditors do not have recourse to the assets of the borrower to satisfy their claims.

Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3.

Central banks, such as the U.S. Federal Reserve System, play a key role in the debt markets.

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level.

In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events (income loss) or internal difficulties (poor management of resources).

In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand.

When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness.

Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health,[31] family stress, stigma, difficulty obtaining employment, exclusion from basic financial services (European Commission, 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim et al., 2003), feeling of insecurity, and relational tensions.

[32] According to historian Paul Johnson, the lending of "food money" was commonplace in Middle Eastern civilizations as early as 5000 BC.