For some millennials and Gen Z-ers, the word debt is only associated with credit cards and student loans. Some don’t even see credit card debt as real debt (major issue here, we have written on this in previous articles and will do so again). But it is. If you’re young and at the beginning stages of your career, credit card debt may in fact be just one form of debt. You’re working now and you want to get the latest hot clothes, worse when outside “keeping” again. Maybe you want some nice appliances for your new apartment, and all the technology your heart can stand. To acquire these items you’ve been hitting up your credit card pretty hard. Credit card debt is your reality; perhaps, student loans are too. As it relates to student loans too often there is a denial about viewing it as debt because, upon completion of your education and finally getting a job it is often hard to come to terms with doing all that work in school to get a job and when you finally have money using a significant portion to pay for school, leaving you feeling like you have not accomplished anything financially.

What is debt?

In reality, debt is not simply money that is owed to an entity like a bank for credit card repayment; it is also money that is owed to a person. So, if someone fronted a bill for you, no matter how small, because you did not have the money to cover it at the time, then you are indebted to that person. Let us say you went to lunch with a friend and belatedly realised you forgot your wallet. If your friend offered to pay your bill, you are indebted to that person. Unless your friend specifically told you your lunch tab was on them, and no repayment was required, you must repay that loan. It is a loan, even if lunch cost $500. Yet there are some people who think that, because the bill was negligible, surely your friend doesn’t expect repayment. But, regardless of how small the amount, the person needs to be compensated and at the time prescribed. If you told the person you’d return the money when you get back to work, then the person has the reasonable expectation that his or her loan will be repaid. This, at the most basic level, is debt.

Debt, at a more advanced level, however, is using anticipated income or future earnings in the present even before it is actually earned to purchase things that you don’t have the cash on hand to buy. It is therefore a financial obligation between one person (the debtor) to pay cash or kind of an agreed-upon value to another person (the creditor). It is a deferred payment or series of payments at a specific time or over a period of time.

Debt generally comprises three main categories: Consumer/individual; business; and government. Today, we will be concerning ourselves with consumer/individual debt, which is most common in modern society, with all indications that it is on the rise in Jamaica. This is why it’s becoming increasingly important to understand how to manage it.

Consumer/individual debt

Consumer debt is the financial obligation owed by individuals and households and includes credit card debt, car, home and student loans, income taxes, as well as informal, person-to-person loans made by friends and relatives to each other. All consumer debt is either of the revolving or non-revolving variety, which will determine the terms on which the loan will be repaid. This kind of debt is either secured or unsecured. Before you become mired in debt, especially as the gift-buying season approaches, it is important that you understand the kind of debt you have.

Revolving versus non-revolving debt

With revolving debt you are able to keep spending while paying off the debt. The best example of this is credit or store credit card debt, which requires simply a monthly minimum payment made to your account to keep it active and viable. A line of credit, which is also offered by a bank, usually to businesses, is also an example of revolving debt. The terms of repayment are pretty much the same: keep making at least the minimum payment to keep the service viable.

Non-revolving debt, on the other hand, is one in which a lump sum is borrowed and then repaid over a specific, agreed-upon time. These kinds of debt therefore involve student loans, personal loans from friends and family, mortgages, and car loans.

Secured vs unsecured debt

Secured debts are for when you decide to purchase a big-ticket items, like maybe a motor car or a home, but don’t have the cash to do so. The lender will require some form of collateral, or asset, he/she can seize in the eventuality that you renege on the repayment of your loan, in order to recoup their loss.

Unsecured debt, on the other hand, doesn’t need collateral because the amount of the loan isn’t that large. There’s no asset which the lender can seize, as in the case of credit card or student loans, but you should understand that this kind of loan is nevertheless legally binding and can negatively impact your ability to borrow in the future, for things like your dream home. Further, the lender has legal options to get back his/her money, which may include your guarantor.

In part 2, we’ll examine other things you should be mindful of for responsibly navigating debt.