What is debt?
Debt is money that one person, business, or government borrows from another — usually with the agreement to repay it later, often with interest.
In simple terms:
Debt = Borrowed money + promise to pay it back (with extra cost).
Basic parts of a debt:
- Principal → the amount borrowed.
- Interest → the cost of borrowing (a percentage of the principal).
- Term → how long you have to repay it.
- Payment schedule → how and when you make payments (e.g., monthly).
Examples:
- Taking out a loan to buy a car or house.
- Using a credit card and not paying the full balance.
- A government bond, where the government borrows from investors.
Example:
If you borrow $1,000 from a bank at 10% annual interest, and agree to pay it back in one year:
- You owe $1,000 (principal)
- Plus $100 (interest)
- Total $1,100 repayment
Formula for Number of Months (Loan Term)
Where:
- n = number of months to repay the loan
- L = loan amount (principal)
- P = monthly payment
- r = monthly interest rate = (annual interest rate ÷ 12)
Example:
You borrowed $10,000, pay $300 per month, at 6% annual interest.
- L = 10,000
- P = 300
- r = 0.06 / 12 = 0.005
Plug in:
It will take about 37 months to repay the debt.