Budgeting is an important
aspect of living and a person who knows how to budget will go a long way in
this commercialized society. Budgeting
has a lot to do with keeping the expenses less than the total income of the
household. Those who are very good at
budgeting can come up with savings even if they have meager incomes.
The problem sets in when a
person fails to make an efficient financial plan and his expenses exceed his
earnings. When this happens, a person
has no choice but to borrow money to make up for his financial
deficiencies. Borrowing once or twice
because of a mismanaged financial plan is normal but when borrowing becomes a
regular thing that can put a person in serious debt problems.
A person who borrows money
from another is said to be in debt. The
debts of a person can be minimal or can reach up to millions depending on the
credit limits of each person. Sometimes,
a person who has assets but isn't liquid can use these assets to get cash. Under this term, the person can be indebted
for an amount less or more than his assets.
There are laws that
provide that a person can never be forced to render services as payment for his
debts. This is called undue servitude
and is prohibited by the laws of some countries. However, there are situations when the person
who is in debt opts to settle his obligation by rendering his services.
This can happen if a
person is so talented in his craft like painting and he opts to pay for his
debts by creating a painting of the creditor or the assignee of the
creditor. Sometimes, a person can pay
his debts gradually or on an installment basis.
When a person dies, the
law has provided for a hierarchy of preferences in the payment of such
debts. Of course, payment of taxes to
the government will always come first.
The second priority for debt payments includes funeral expenses of the
deceased and the payment for the wages of people.
Debt is really just a
simple concept, which provides that a person who borrowed something from
another is duty bound to pay that debt.
However, the concept of debt becomes more complicated with the
introduction of other concepts like mortgage, interest rates and other
charges. Interest makes most debts
double or even triple in amount. More
often, the interest rates due for a certain debt is even higher than the
principal amount borrowed.
A person who wants to get
credit can do so in the form of a loan.
A loan can either be secured to unsecured. A secured loan means the debtor borrowed some
money and supported the loan by collateral or a security for the loan. The security or collateral can come in the
form of a house and lot, a car or any asset of the debtor. An unsecured loan means otherwise.
Most creditors require a
security before granting a loan because it gives them something to hold on to
or to forfeit in case the debtor defaults in payment. When the debtor fails to pay the debt within
the agreed timeframe then the creditor can foreclose the security or the
collateral.
However, having an
unsecured loan doesn't mean that the debtor can renege on his debts. When the debtor fails to pay his loans, the
creditor can still run after him by filing a case in court. When this happens, the debtor who has no cash
can sell some of his assets to pay for his outstanding loan.
Being in debt is common
even for the rich and the famous; the only difference between them and the
common people is that their debts can be in the millions since they have more
assets to support their loan. Unsecured
loans most often have higher interest rates to make up for the lack of
security.
Even third world countries
are indebted to more developed countries.
However, the debts of a country can go on forever because they keep on
paying their loan but they also get new credits as their credit ratings go up.
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