when students take out federal student loans to pay for college they will receive a certain sum of money that they agree to pay back in the future with interest students now have the option of several different repayment plans if they choose what s known as the standard repayment plan they will be required to make fixed monthly payments for 10 years at which point their debt will be completely paid off 1
each of those monthly payments will represent a portion of the principal they owe plus interest on their debt the interest rate on federal student loans for undergraduates is currently 5 50 2types of consumer debtdebt can come in a variety of forms each with their own uses and requirements most types of debt fall into one or more of the following categories secured debt is also known as collateralized debt that means the borrower has pledged something of value to back up the debt with a car loan for example the vehicle usually serves as collateral if the borrower fails to repay the money they borrowed to buy the car the lender can seize and sell it similarly when someone takes out a mortgage to buy a home the home itself typically serves as collateral if the borrower fails to make payments the lender can foreclose and take the home a company that wants to borrow money might pledge a piece of machinery real estate or cash in the bank as collateral unsecured debt does not require any collateral as security instead the lender decides whether to grant a loan based on the borrower s creditworthiness as indicated by their credit score credit history and other factors most credit cards and most personal loans are examples of unsecured debt because unsecured debt can be riskier to the lender it generally commands a higher interest rate than secured debt revolving debt provides the borrower with a line of credit that they are able to borrow from as they wish the borrower can take up to a certain amount pay the debt back and borrow up to that amount again the most common form of revolving debt is credit card debt as long as the borrower fulfills their obligations typically by making monthly payments of at least a certain minimum amount the line of credit remains available for as long as the account is active over time with a favorable repayment history the amount of revolving debt that s available to the borrower may increase a mortgage is a type of secured debt used to purchase real estate such as a house or condo mortgages are usually paid back over long periods such as 15 or 30 years mortgages are often the largest debt apart from student loans that consumers will ever take on and they come in many different varieties two broad categories are fixed rate mortgages and adjustable rate mortgages or arms in the case of arms the interest rate can change periodically usually based on the performance of a particular index types of corporate debtcompanies that want to borrow money have some options that aren t available to individual consumers in addition to loans from a bank or other lender they are often able to issue bonds and commercial paper bonds are a debt instrument that allow a company to borrow funds from investors by promising to repay the money with interest both individuals and investment firms can purchase bonds which typically carry a fixed interest or coupon rate if a company needs to raise 1 million to fund the purchase of new equipment for example it could issue 1 000 bonds with a face value of 1 000 each bonds commonly become due at a certain date in the future called the maturity date at which time the investor will receive the bond s full face value in addition the investor will have received regular interest payments throughout the intervening years commercial paper is short term corporate debt with a maturity of 270 days or less 3advantages and disadvantages of debtproperly used debt can be advantageous to individuals and companies alike few people could buy a home without a mortgage and many people couldn t afford a new car without an auto loan credit cards can be a great convenience and even a lifesaver in emergency situations for companies access to debt can make all the difference in their ability to expand and compete but debt can be risky for borrower and lender alike with enough credit cards in their wallets consumers can easily accumulate an unmanageable amount of debt especially if they lose their jobs or face another serious setback companies that take on a large amount of debt may not be able to make their interest payments if sales drop putting the business in danger of bankruptcy even if it doesn t reach that point having too much debt can impose a crippling burden on a company requiring it to devote much of its income to debt repayment rather than more productive purposes 