financialtreat – will explain about the 10 Types of Debt Financial and Its Complete Understanding that you will get in the following article. let’s look at this article carefully!
Debt is required when needs increase but income is limited. There are types of debts that can be selected according to their advantages. Therefore on this occasion we will discuss about financial debt. Let’s see the review here.
Every year, the need for individuals is constantly increasing. However, increased needs are sometimes not accompanied by comparable income or salaries. In order to keep the needs met, some people choose to go into debt. However, did you know that there are several types of financial debt that can be applied for?
10 Types of Debt Financial and Its Complete Understanding
Debt is a form of lending to an individual or forum. Types of debt of various varieties. Starting from debt in the form of cash to securities. Usually residents are in debt to buy a house, a car, or develop a business. For more details, let’s look at the review below.
Definition of Money
The definition of debt is a loan of funds either in the form of cash or securities that are used to buy goods or services as a fulfillment of needs, where the loan must be returned within an exclusive period of time. The person who has a debt is obliged to return the loan either paid in full or in installments. The amount of debt or debt depends on each individual or company’s needs.
1. Types of Debt Based on Fund Management
The type of debt arising on financial management consists of productive debt and consumptive debt. Let’s look at the explanation.
Debts of this type are aimed at obtaining financial benefits by going into debt. For example, productive debt is used for investment, working capital, business capital, buying a house to rent back, or buying a vehicle so that it can be used to help with work activities. From the debt used for business development, entrepreneurs can get income and profits. Well, that profit can be used to pay installments or pay off debts.
Adapted to its name, consumptive debt is a loan used for consumption purposes that are not urgent or unimportant in nature. Therefore, this type of debt does not have a positive effect and can actually increase your financial problems. Consuming goods purchased with debt will experience depreciation in value or price. So that if resold, the price of these items will drastically decrease in price from the purchase price.
3 Types of Debt Based on Repayment Time
Based on the repayment time, the types of debt are divided into three, namely short-, medium-term, and long-term debt. Here’s a description of the explanation.
1. Types of Short-Term Debt
The short-term debt type is a type of loan with a shorter repayment period. Usually the maximum time limit for repayment is approximately one year. Not only that, the type of short-term debt is better known as the type of current debt.
In a company that has a short-term type of debt, usually when paying off debts using a source that can create new debts for the company. Examples of short-term debt types such as estimated tax debt, cost debt, accounts payable, and money order debt.
Here are the types of short-term debt, as follows:
- Deferred revenue or income received at the beginning of receiving money for the sale of goods/services that have not been carried out. Long-term debt that is directly due half or all of the long-term debt that has become a short-term debt because it must be paid immediately.
- Fees to be paid fees that have already occurred and must be paid.
- Money order debt: a written agreement on the amount of money for financing, purchases or other transactions on the loose that is agreed upon in the future.
- Account payable or accounts payable: an amount of money that must be paid by the company to the supplier for the purchase of goods/services.
2. Types of Medium-Term Debt
The medium-term debt type is a term for repayment of debt in a period that is not very short and long. Usually the repayment time of this type of medium-term debt is approximately 5 to 10 years.
3. Types of Long-Term Debt
At the end of the long-term debt type, namely the loan with the longest repayment period. Long-term types of debt are found in fairly large loan amounts. The term of this debt is also usually more than 10 years.
The type of long-term debt itself consists of various debt products, including:
- Venture capital: a form of company capital participation in other companies that require capital within an exclusive period of time.
- Preferred stock: a type of stock characterized by bonds, the amount of a fixed dividend earned, and usually an exclusive amount of the nominal content of the preferred stock each period.
- Debt from financial forums: To get a loan from a financial forum requires a fee and can be paid amortized or in installments.
- Mortgage: an instrument of debt with the help of dependents on property and loans to creditors as a cost on obligations.
- Shares: proof of ownership of a company and shareholders will receive capital gains and dividends.
- Bond debt: a financial instrument issued by the company and sold to investors. The company will issue securities containing an agreement on the amount of payment in the exclusive period.
Characteristics of Debt Based on Repayment Time
To distinguish between types of debt, you can understand it through a review of the characteristics of the type of debt below.
Characteristics of Long-Term Debt
The following are the characteristics of long-term debt including:
- Owner of a Motor Vehicle), or other securities.
- Payment is paid in installments over a long period of time.
- The existence of interest is adjusted to the agreement of both parties.
- Off the maturity is about a year, let alone it can be more than that.
- Repayment period above 10 years
- There are costs in the form of assets or costs, such as certificates, BPKB (Proof of this type of debt is often found in financial forums or banks that provide long-term debt types.
- The nominal debt is usually very large.
1. Characteristics of Medium-Term Debt
Meanwhile, the characteristics of medium-term debt include:
- The loan repayment time is between 5 to 10 years.
- The nominal debt is not really big but also not very small.
- There is an interest rate in the loan.
- There are financial forum parties who ask for fees or not depending on the amount and applicable provisions.
2. Characteristics of Short-Term Debt
Short-term debt can be recognized by the following characteristics:
- The maturity is under 1 year.
- Repayment time 1-3 years. Maximum under 5 years old.
- Payment in full or term payments in installments.
- Debts between individuals are not pegged to interest. But if you owe it through the bank, you will get a large interest rate.
- It usually costs no money, only based on trust or written agreement.
- Short-term debt providers are not just banks, they can be found between individuals.
When Is The Right Time To Go Into Debt?
Before going into debt, you need to make a balanced comparison between debt and income to maintain financial health. You should understand the ratio of debt and income wisely. This ratio is measured based on monthly debt installment payments balanced with monthly income.
Here’s the formula for calculating the ratio of debt and income:
(Number of Installments per month: Amount of Income per Month) x 100Prosen. From the formula, to measure the result use the indicators below:
1. Ideal/Adjusted to Income
If the result of the formula is in the range of less than 35 Percent, then the financial flow is said to be ideal. Usually, the Bank will be more free to provide additional loans because customers are recognized as being able to pay regularly and have minimal risk to delay installments. By always staying in maintaining the ratio of debt and income at this figure, and paying installments regularly, your finances will remain healthy even though you have debt.
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2. Less than ideal
Finances with debt and income ratios in the range of 36 percent to 49 percent are classified as less than ideal. You can recalculate all your needs and reduce uncontrolled expenses. If you do not succeed in reducing this ratio to the ideal position, then there may be problems in your finances. So it has the potential to not have the ability to pay debts.
The result of the figure of more than 50 percent comes in as a financial red zone. There is no equilibrium between income and debt installments. Usually if it reaches this number, you cannot pay the installments and in the end postpone the installments. Immediately ask for the help of a financial consultant to help you in handling this case. You have to increase your income or income in order to repay debt.
Well, that was a complete review of financial debt. Going into debt is not wrong as long as you can pay it off on time. But, it would be nice if you avoided the norm. Start reducing debt and increasing the intensity of saving. Hopefully useful and so thank you.