It is not difficult to understand the concept of debt. This concept has been around for hundreds of years. It is simply borrowing something from someone that you need, and that they own. By borrowing something, you are in debt to the lender and when you give it back, you are no longer in debt.

When we are talking about lending money, then this money is not usually lent for free. The money lender will make a charge for the privilege of lending the money. This charge is called interest and is usually a fixed or variable percentage rate of the amount of money borrowed. A fixed interest rate means that the interest rate on the loan of money cannot go up or down for the period of the loan. A variable interest rate means that the interest can go up as well as down during the life of the loan. This can occur when the Reserve Bank raises official interest rate change and the lender decides to pass this on to the customer. The lender will have to notify the customer in writing if these are going to change your interest rate.

You will nearly always pay back more than you originally borrowed and this maintains a profit for the lender. In some cases, you may pay back several times more than the original amount borrowed. If you miss a payment you may be charged a penalty fee and it could affect your credit rating. You credit rating is the ability to obtain credit – the higher your credit rating, the better chance you have of obtaining a loan.

Why Do People Get Into Debt?

There are many reasons why people get into debt. One of the main reasons is that people simply do not have enough money to live on. Some people living in poverty have to borrow to meet basic needs such as food and clothes for the children. Other people borrow money for luxuries such as holidays, house improvements or a new car. Another cause of debt is that circumstances may change. Redundancies happen and people lose their jobs or their overtime. Relationships fall apart or they may suffer bereavements. Often, many people simply borrow too much and become caught up in more debt to make ends meet.