CFP

Financing Strategies - Debt (Long-Term, Short-Term, Secured and Unsecured)

Long-term vs. short-term debt
  1. Long-term debt -Loans and financial obligations lasting more than one year. Examples include home mortgages and student loans. Also known as noncurrent liabilities.
  2. Short-term debt - Debt due in one year or less. Also known as current liabilities.

Secured vs. unsecured debt
  1. Secured debt - Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage. Your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt. Assets backing debt or a debt instrument are considered security, which means they can be claimed by the lender if default occurs.
  2. Unsecured debt - A loan not secured by an underlying asset or collateral. Unsecured debt is the opposite of secured debt. Unsecured debt carries more risk for the lender, which in turn makes the loan more expensive. The more additional risk that a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher rates.




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