Debt, mortgage and collateral: Deciphering jargons

NS Evergrande fiasco brought back the focus on debt, a term that both motivates and frightens people.

Chinese real estate developer experiencing a serious liquidity shortage, It sits on a debt pile of US$305 billion – 2.1% of the country’s total gross domestic product (GDP).

The embattled group saw their cash reserves plummet due to the slowdown in the Chinese real estate market – triggered by a decline in property prices, as well as a lack of ways to raise funds after state-owned lenders in China cut their lines of credit.

At a time when there was too much liquidity in the system, the Evergrande saga shed a dazzling light on corporate debt.

So what is debt?

Debt usually refers to the amount of money one party borrows from the other. A loan arrangement allows the borrower to borrow money on condition that it is repaid at a later date, usually with interest. It is used by a company or individual if they want to buy a big ticket, otherwise it cannot be bought by them. This money is repaid in small portions with interest.

What are the types of debt?

There can be two types of loans – one is lent to individuals and the other to companies. While individual debt is only in the form of credit, there is a gamut of debt products for companies. Debt products for companies include loans, bonds, commercial papers and debt, among others. The loan can be secured or unsecured. Secured debt is one that has an underlying collateral, while an unsecured debt does not have any underlying collateral.

What is collateral?

A guarantee An asset that the lender accepts as collateral for the money lent. This could be in the form of real estate or other types of assets, depending on the purpose of the loan. The collateral acts as a guarantee of repayment for the lender. If the borrower defaults on loan payments, the lender can confiscate the collateral and sell it to cover some or all of its losses.

What is a mortgage?

A mortgage property – is a loan used to finance a house, land or other type of real estate. The property from which the loan is taken acts as collateral in this case. Mortgage loan applications often go through a rigorous underwriting process before loans are granted. Types of mortgages vary according to the needs of the borrower, as do conventional and fixed-rate loans.

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