Debt Deflation

AAA

DEFINITION of 'Debt Deflation'

A situation in which the collateral used to secure a loan (or another form of debt) decreases in value. This can be detrimental because it may lead to a restructuring of the loan agreement or the loan itself.

Also known as "worst deflation" and "collateral deflation".

INVESTOPEDIA EXPLAINS 'Debt Deflation'

A mortgage, which is a form of secured debt, presents a good example. Let's say you purchased a home by taking out a mortgage. That same home would be secured as collateral for the loan, meaning that if you defaulted on payments to the bank, the home would be repossessed by the bank. If the potential selling price of the home decreased in value while you were still making payments to the bank, you would be in the middle of a debt deflation scenario.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  3. Inflationary Psychology

    A state of mind that leads consumers to spend more quickly in ...
  4. Default

    1. The failure to promptly pay interest or principal when due. ...
  5. Loan

    The act of giving money, property or other material goods to ...
  6. Deflation

    A general decline in prices, often caused by a reduction in the ...
Related Articles
  1. Understanding Your Mortgage
    Personal Finance

    Understanding Your Mortgage

  2. Do Deflationary Shocks Help Or Hurt ...
    Economics

    Do Deflationary Shocks Help Or Hurt ...

  3. The Consumer Price Index: A Friend To ...
    Options & Futures

    The Consumer Price Index: A Friend To ...

  4. The Upside Of Deflation
    Mutual Funds & ETFs

    The Upside Of Deflation

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center