Editing Debt (section)

== Types of giving finance ==

=== Individuals ===
Common types of debt owed by individuals and households include [[mortgage loan]]s, car loans, [[credit card]] debt, and [[income tax]]es. For individuals, debt is a means of using anticipated [[income]] and future [[purchasing power]] in the present before it has actually been earned. Commonly, people in industrialized nations use consumer debt to purchase houses, cars and other things too expensive to buy with cash on hand.

People are likely to spend more and get into debt when they use credit cards as against cash to buy products and services.<ref>Chatterjee, P., & Rose, R. L. (2012). [https://kuscholarworks.ku.edu/bitstream/handle/1808/17603/ChatterjeeNew.pdf?sequence=1&isAllowed=y Do payment mechanisms change the way consumers perceive products?] {{Webarchive|url=https://web.archive.org/web/20150912101134/http://kuscholarworks.ku.edu/bitstream/handle/1808/17603/ChatterjeeNew.pdf?sequence=1&isAllowed=y |date=12 September 2015 }} Journal of Consumer Research, 38(6), 1129–1139.</ref><ref>Pettit, N. C., & Sivanathan, N. (2011). The plastic trap. Social Psychological and Personality Science, 2(2), 146-153.</ref><ref name="auto">Prelec, D. & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.</ref><ref name="auto1">Raghubir, P. & Srivastava, J. (2008), [http://204.14.132.173/pubs/journals/releases/xap143213.pdf Monopoly money: The effect of payment coupling and form on spending behavior] {{Webarchive|url=https://web.archive.org/web/20150215041600/http://204.14.132.173/pubs/journals/releases/xap143213.pdf |date=15 February 2015 }}. Journal of Experimental Psychology: Applied, 14 (3), 213–25.</ref><ref name="auto2"/> This is primarily because of the transparency effect and consumer's "[[pain of paying]]."<ref name="auto" /><ref name="auto2">Soman, D. (2003). [http://www-2.rotman.utoronto.ca/facbios/file/transparency.pdf The effect of payment transparency on consumption: Quasi experiments from the field] {{Webarchive|url=https://web.archive.org/web/20180219075854/http://www-2.rotman.utoronto.ca/facbios/file/transparency.pdf |date=19 February 2018 }}. Marketing Letters, 14, 173–183.</ref> The transparency effect refers to the idea that the further you are from cash (as with a credit card or other forms of payment), the less transparent it is and the less aware you are of how much you have spent.<ref name="auto2" /> The less transparent or further away from cash the form of payment employed is, the less an individual feels the "[[pain of paying]]" and thus is likely to spend more.<ref name="auto" /> Furthermore, the differing physical appearance/form that credit cards have from cash may cause them to be viewed as [[Monopoly money#As a phrase|"monopoly" money]] vs. real money, luring individuals to spend more money than they would if they only had cash available.<ref name="auto1" /><ref>Chatterjee, P., & Rose, R. L. (2012). Do payment mechanisms change the way consumers perceive products? Journal of Consumer Research, 38(6), 1129–1139.</ref>

Besides these more formal debts, private individuals also lend informally to other people, mostly relatives or friends. One reason for such informal debts is that many people, in particular those who are poor, have no access to affordable credit. Such debts can cause problems when they are not paid back according to expectations of the lending household. In 2011, 8 percent of people in the [[European Union]] reported their households has been in arrears, that is, unable to pay as scheduled "payments related to informal loans from friends or relatives not living in your household".<ref>{{cite web|url=http://www.eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2013/73/en/2/EF1373EN.pdf|title=Household over-indebtedness in the EU: The role of informal debts.|date=2013|website=eurofound.europa.eu|publisher=Publications Office of the European Union, Luxembourg|access-date=19 April 2016|archive-date=8 December 2014|archive-url=https://web.archive.org/web/20141208105301/http://www.eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2013/73/en/2/EF1373EN.pdf|url-status=live}}</ref>

=== Businesses ===
A [[company]] may use various kinds of debt to [[finance]] its operations as a part of its overall [[corporate finance]] strategy.

A [[term loan]] is the simplest form of corporate debt. It consists of an agreement to lend a fixed amount of money, called the [[principal sum]] or principal, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans [[interest]], calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called "[[bullet loan]]s", particularly if there is only a single payment at the end – the "bullet" – without a "stream" of interest payments during the life of the loan.

A [[revenue-based financing]] loan comes with a fixed repayment target that is reached over a period of several years. This type of loan generally comes with a repayment amount of 1.5 to 2.5 times the principle loan. Repayment periods are flexible; businesses can pay back the agreed-upon amount sooner, if possible, or later. In addition, business owners do not sell [[equity (finance)|equity]] or relinquish control when using revenue-based financing. [[Lenders]] that provide revenue-based financing work more closely with businesses than bank lenders, but take a more hands-off approach than [[private equity]] [[investors]].<ref>{{cite web |last1=Uzialko |first1=Adam |title=Using Revenue-Based Financing to Grow Your Business |url=https://www.businessnewsdaily.com/6659-revenue-based-financing-tips.html |website=Business News Daily |access-date=5 December 2018 |archive-date=1 November 2017 |archive-url=https://web.archive.org/web/20171101061705/http://www.businessnewsdaily.com/6659-revenue-based-financing-tips.html |url-status=live }}</ref>

A [[syndicated loan]] is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. A syndicated loan is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. Loan syndication is a [[risk management]] tool that allows the lead banks [[underwriting]] the debt to reduce their risk and free up lending capacity.

A company may also issue [[Bond (finance)|bonds]], which are debt [[security (finance)|securities]]. Bonds have a fixed lifetime, usually a number of [[year]]s; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as [[coupon (bond)|coupons]]) during the life of the bond.

A [[letter of credit]] or LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the [[land development]] process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the [[advising bank]] of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any.{{cn|date=May 2023}} In executing a transaction, letters of credit incorporate functions common to [[Giro (banking)|giro]]s and [[traveler's cheque]]. Typically, the documents a beneficiary has to present in order to receive payment include a [[commercial invoice]], [[bill of lading]], and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

[[Debt consolidation]] is a process whereby a new, large [[Loan#Personal|loan application]] is submitted in order to compensate for numerous outstanding loans.{{cn|date=February 2025}} Some amongst those who are heavily indebted often resort to debt consolidation as a means to resolve their financial difficulties.<ref>{{Cite web |title=Credit card hardship programs: What to know about this debt relief option |url=https://www.cbsnews.com/news/credit-card-hardship-programs-what-to-know-about-this-debt-relief-option/ |access-date=2024-07-22 |website=www.cbcsnews.com |date=18 April 2024 |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.cbsnews.com/news/credit-card-hardship-programs-what-to-know-about-this-debt-relief-option/ |url-status=live }}</ref><ref>{{Cite web |title=An Example of Debt Consolidation |url=https://www.investopedia.com/terms/d/debtconsolidation.asp#toc-an-example-of-debt-consolidation |access-date=2024-07-22 |website=www.investopedia.com |language=en-GB |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.investopedia.com/terms/d/debtconsolidation.asp#toc-an-example-of-debt-consolidation |url-status=live }}</ref> Upon obtaining the borrowed loan, those within the receiving end are then generally enabled to have a greater cash flow, resulting from lowering monthly payments, if not reducing [[interest rates]].<ref>{{Cite web |title=Pros and cons of debt consolidation: Is it a good idea? |url=https://www.bankrate.com/personal-finance/debt/pros-and-cons-of-debt-consolidation/#:~:text=Consolidating%20your%20debt%20likely%20isn,currently%20pay%20on%20your%20debts |access-date=2024-07-22 |website=www.bankrate.com |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185714/https://www.bankrate.com/personal-finance/debt/pros-and-cons-of-debt-consolidation/#:~:text=Consolidating%20your%20debt%20likely%20isn,currently%20pay%20on%20your%20debts |url-status=live }}</ref> However, this varies from every claimant, in that their own eligibility for such is entirely dependent on their own overall circumstances;<ref>{{Cite web |title=How Do I Know If I'm Eligible For a Debt Consolidation Loan? |url=https://consolidationexpert.co.uk/knowledge-hub/how-do-i-know-if-im-eligible-for-a-debt-consolidation-loan/ |access-date=2024-07-22 |website=www.consolidationexpert.co.uk |language=en-UK |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185715/https://consolidationexpert.co.uk/knowledge-hub/how-do-i-know-if-im-eligible-for-a-debt-consolidation-loan/ |url-status=live }}</ref><ref>{{Cite web |title=Thinking of consolidating your debt? Here are four signs it could be the right move for you |url=https://www.cnbc.com/select/when-to-consolidate-debt/ |access-date=2024-07-22 |website=[[CNBC]] |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.cnbc.com/select/when-to-consolidate-debt/ |url-status=live }}</ref> Should they meet specific requirements, being able to afford such, their requests are usually accepted; Should they fail the criteria, they're almost always swiftly rejected, regardless of their financial ability.<ref>{{Cite web |title=How Do You Qualify for a Debt Consolidation Loan? |url=https://www.marketwatch.com/guides/personal-loans/how-to-qualify-for-a-debt-consolidation-loan/ |access-date=2024-07-22 |website=www.marketwatch.com |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.marketwatch.com/guides/personal-loans/how-to-qualify-for-a-debt-consolidation-loan/ |url-status=live }}</ref> Given the often monetary hardship of contenders, those providing these loans often charge at larger rates of interest than others;<ref>{{Cite web |title=Debt Consolidation - National Deadline |url=https://nationaldebtline.org/get-information/guides/debt-consolidation-ew/#:~:text=Some%20consolidation%20loans%20can%20have,higher%20interest%20rate%20than%20expected. |access-date=2024-07-22 |website=www.nationaldeadline.com |language=en-US}}</ref> This is often critiqued by its opponents,<ref>{{Cite web |title=Professor Gregory Germain Provides Insights into Debt Consolidation Loans and Low-Income Loans at Money Geek |url=https://law.syracuse.edu/news/professor-gregory-germain-provides-insights-into-debt-consolidation-loans-and-low-income-loans-at-money-geek/ |access-date=2024-07-22 |website=www.law.syracuse.edu |date=9 October 2023 |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185714/https://law.syracuse.edu/news/professor-gregory-germain-provides-insights-into-debt-consolidation-loans-and-low-income-loans-at-money-geek/ |url-status=live }}</ref> who claim that it is an unfair practice aimed at targeting those who are desperate and often holds arbitrary figures,<ref>{{Cite web |title=Debt Consolidation Loan Statistics & Trends in 2024 |url=https://www.forbes.com/advisor/personal-loans/debt-consolidation-loan-statistics/ |access-date=2024-07-22 |website=www.forbes.com |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.forbes.com/advisor/personal-loans/debt-consolidation-loan-statistics/ |url-status=live }}</ref> although those in its defence claim it is a security measure aimed at ensuring its repayment obligations and must take precautions before offering large sums.<ref>{{Cite web |title=What is the average debt consolidation loan rate? |url=https://www.creditkarma.com/personal-loans/i/average-debt-consolidation-loan-rate |access-date=2024-07-22 |website=www.creditkarma.com |date=15 May 2019 |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.creditkarma.com/personal-loans/i/average-debt-consolidation-loan-rate |url-status=live }}</ref> Both arguments have resulted in greater debate amongst legislators in different nations, amidst demands for further regulation and more decreases in lending restrictions. Debt consolidation has also been an [[Unsecured debt|area of interest]] for [[loan sharks]], leaving those heavily indebted vulnerable to extortionate rates. The idea behind debt consolidation is occasionally a matter of debate in the financial and institutional sectors, often ranging between analysts towards professors, generally concerning ethics involved in different areas.<ref>{{Cite web |title=Professor Rebucci was featured in WalletHub |url=https://econ.jhu.edu/2024/04/15/professor-rebucci-was-featured-in-wallethub/ |access-date=2024-07-22 |website=www.econ.jhu.edu |date=15 April 2024 |language=en-US |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://econ.jhu.edu/2024/04/15/professor-rebucci-was-featured-in-wallethub/ |url-status=live }}</ref><ref>{{Cite journal |title=Debt Consolidation and Financial Stability |url=https://www.cairn.info/revue-economique-2011-6-page-1067.htm |access-date=2024-07-22 |journal=Revue Économique |date=2011 |doi=10.3917/reco.626.1067 |language=en-GB |last1=Angeloni |first1=Ignazio |last2=Faia |first2=Ester |last3=Winkler |first3=Roland |volume=62 |issue=6 |pages=1067–1079 }}</ref><ref>{{Cite journal |title=Public debt consolidation and its distributional effects |url=https://www.esri.ie/publications/public-debt-consolidation-and-its-distributional-effects |access-date=2024-07-22 |website=www.esri.ie |date=2 July 2019 |language=en-GB |last1=Varthalitis |first1=Petros |last2=Sakkas |first2=Stelios |archive-date=22 July 2024 |archive-url=https://web.archive.org/web/20240722185713/https://www.esri.ie/publications/public-debt-consolidation-and-its-distributional-effects |url-status=live }}</ref><ref>{{Cite web |title=Government debt consolidation advice and programmes |url=https://www.oceanfinance.co.uk/loans/debt-consolidation/government-debt-consolidation-advice/ |access-date=2024-07-22 |website=www.oceanfinance.co.uk |language=en-GB}}</ref>

Companies also use debt in many ways for [[capital expenditure]]s and other business [[Investment (macroeconomics)|investment]]s produced in their [[asset]]s, "leveraging" the return on their [[Capital stock|equity]]. This [[Debt to equity ratio|leverage]], the proportion of debt to equity, is considered paramount in determining the riskiness of an investment, under the notion that it becomes more risking under more debt.

=== Governments ===
{{Main|Government debt}}
[[File:1979 $10,000 Treasury Bond .jpg|thumb|right|1979 U.S. Government $10,000 [[treasury bond]]]]
Governments issue debt to pay for ongoing expenses as well as major capital projects. Government debt may be issued by sovereign states as well as by local governments, sometimes known as municipalities.

Debt issued by the government of the United States, called [[United States Treasury security|Treasuries]], serves as a reference point for all other debt.  There are deep, transparent, liquid, and open capital markets for Treasuries.<ref>Lew, Jacob (2016), [https://www.foreignaffairs.com/articles/united-states/2016-04-11/america-and-global-economy America and the Global Economy] {{Webarchive|url=https://web.archive.org/web/20181203182710/https://www.foreignaffairs.com/articles/united-states/2016-04-11/america-and-global-economy |date=3 December 2018 }}, Foreign Affairs, May/June 2016.</ref>  Furthermore, Treasuries are issued in a wide variety of maturities, from one day to thirty years, which facilitates comparing the interest rates on other debt to a security of comparable maturity.  In finance, the theoretical "[[risk-free interest rate]]" is often approximated by practitioners by using the current yield of a Treasury of the same duration.

The overall level of indebtedness by a government is typically shown as a ratio of [[Debt-to-GDP ratio|debt-to-GDP]]. This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due.

The United Nations [[Sustainable Development Goal 17]], an integral part of the [[Sustainable Development Goals|2030 Agenda]] has a target to address the external debt of highly indebted poor countries to reduce debt distress.<ref>{{Cite web|title=Goal 17 {{!}} Department of Economic and Social Affairs|url=https://sdgs.un.org/goals/goal17|access-date=2020-09-26|website=sdgs.un.org|archive-date=2 November 2021|archive-url=https://web.archive.org/web/20211102145921/https://sdgs.un.org/goals/goal17|url-status=live}}</ref>

=== Municipalities ===
Municipal bonds (or muni bonds) are typical debt obligations, for which the conditions are defined unilaterally by the issuing municipality (local government), but it is a slower process to accumulate the necessary amount. Usually, debt or bond financing will not be used to finance current operating expenditures, the purposes of these amounts are local developments, capital investments, constructions, own contribution to other credits or grants.<ref>{{Cite journal|last=Vértesy|first=László|date=2020|title=Debt Management Strategies of Local Governments in the EU|url=http://real.mtak.hu/117799/|journal=Pro Publico Bono – Magyar Közigazgatás|volume=8|pages=146–169|doi=10.32575/ppb.2020.1.8|s2cid=229409912|via=REAL-MTAK|doi-access=free|access-date=27 December 2020|archive-date=14 April 2021|archive-url=https://web.archive.org/web/20210414233802/http://real.mtak.hu/117799/|url-status=live}}</ref>