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Debt facts for kids

Kids Encyclopedia Facts

Debt is what someone owes to someone else. Usually, debt is in the form of money, but it can also be items, services, favors, or other things. Thus if you make an agreement to give or do something for someone else, you now owe a debt.

Types of debt

Goods, services or money borrowed with the intent of repayment (in kind or not) creates a debt. Debt can be secured or unsecured in nature.

A secured debt uses collateral, which is an asset that is promised to the debt-holder until the debt has been repaid. If the repayment is not made in full, the lender gets the collateral asset. For instance, a car loan typically creates a secured debt. If you still owe money on the car loan and do not make timely payments, the note-holder can take back (or repossess) the car and sell it to get the money still due. A home mortgage is similar.

An unsecured debt is more risky to the debt-holder (the lender, also called creditor). In the event of non-payment of the debt, the lender cannot take assets. Credit card debt is typically unsecured. If you charge items to a credit card and do not make the monthly payments, the credit card issuer can report the non-payment to the credit-reporting agencies. That will reduce your credit score so others will not lend you money. But usually they cannot take back whatever you bought with the card.

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Debt Facts for Kids. Kiddle Encyclopedia.