Debt facts for kids

Imagine you borrow something from a friend, like a book or a video game. You promise to give it back later. That promise means you have a debt to your friend. Debt is simply something you owe to someone else. It's usually about money, but it can also be things, favors, or even promises to do something.

What is Debt?

When you borrow money, items, or even a favor from someone, you create a debt. This means you have an agreement to pay back what you borrowed or do what you promised. It's a common part of life for people, businesses, and even countries.

Types of Debt

There are different kinds of debt, depending on how risky they are for the person or company lending the money. The two main types are secured debt and unsecured debt.

Secured Debt

A secured debt means you promise something valuable as a backup if you can't pay back what you owe. This valuable item is called collateral. If you don't make your payments, the lender (the one who lent you the money) can take the collateral.

For example, when an adult buys a car with a loan, the car itself is often the collateral. If they stop making payments, the lender can take the car back. A home mortgage works in a similar way; the house is the collateral.

Unsecured Debt

An unsecured debt is different because there's no collateral. This means if you don't pay back the debt, the lender can't just take something valuable from you. This type of debt is riskier for the lender.

A common example of unsecured debt is credit card debt. If someone uses a credit card to buy things and then doesn't make the payments, the credit card company can't take back the items bought. However, not paying back unsecured debt can still have serious consequences. It can hurt a person's "credit score," which makes it harder to borrow money in the future.

Why Debt Matters

Debt can be helpful because it allows people to buy things they need now, like a house or a car, and pay for them over time. Businesses use debt to grow and invest. However, it's important to manage debt carefully. If someone takes on too much debt and can't pay it back, it can lead to financial problems.

Related Topics

• Loan

Images for kids

• 

  Payday loan businesses lend money to customers, who then owe a debt to the payday loan company.

• 

  1979 U.S. Government $10,000 treasury bond

See also

In Spanish: Deuda para niños