Debt is an obligation that requires one party, the

debtor A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

, to pay

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...

borrowed or otherwise withheld from another party, the

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...

. Debt may be owed by a

sovereign state A sovereign state is a State (polity), state that has the highest authority over a territory. It is commonly understood that Sovereignty#Sovereignty and independence, a sovereign state is independent. When referring to a specific polity, the ter ...

or country,

local government Local government is a generic term for the lowest tiers of governance or public administration within a particular sovereign state. Local governments typically constitute a subdivision of a higher-level political or administrative unit, such a ...

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

, or an individual. Commercial debt is generally subject to

contractual term A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as ...

s regarding the amount and timing of repayments of principal and

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

Loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

s, bonds, notes, and

mortgages A mortgage loan or simply mortgage (), in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pur ...

are all types of debt. In

financial accounting Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for pu ...

, debt is a type of

financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, Service (economics), services, or assets for payment. Any transaction involves a change in the status of the finances of two or mo ...

, as distinct from equity. The term can also be used metaphorically to cover

moral A moral (from Latin ''morālis'') is a message that is conveyed or a lesson to be learned from a story or event. The moral may be left to the hearer, reader, or viewer to determine for themselves, or may be explicitly encapsulated in a maxim. ...

obligations and other interactions not based on a monetary value. For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.

Etymology

The English term "debt" was first used in the late 13th century and comes by way of

Old French Old French (, , ; ) was the language spoken in most of the northern half of France approximately between the late 8th The related term "debtor" was first used in English also in the early 13th century.

Terms

Principal

Principal is the amount of money originally invested or loaned, on which basis interest and returns are calculated.

Repayment

There are three main ways repayment may be structured: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be amortized over the term of the loan; or the loan may be partially amortized during its term, with the remaining principal due as a "balloon payment">Amortization (business)">amortized over the term of the loan; or the loan may be partially amortized during its term, with the remaining principal due as a "balloon payment" at maturity. Amortization structures are common in

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

s and credit cards.

Default provisions

Debtors of every type default (finance), default on their debt from time to time, with various consequences depending on the terms of the debt and the law governing default in the relevant jurisdiction. If the debt was secured by specific collateral, such as a car or house, the creditor may seek to repossess the collateral. In more serious circumstances, individuals and companies may go into

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

Types of giving finance

Individuals

Common types of debt owed by individuals and households include

mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

s, car loans, credit card debt, and

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

es. For individuals, debt is a means of using anticipated

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

and future

purchasing power Purchasing power refers to the amount of products and services available for purchase with a certain currency unit. For example, if you took one unit of cash to a store in the 1950s, you could buy more products than you could now, showing that th ...

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.Prelec, D. & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.Raghubir, P. & Srivastava, J. (2008)
Monopoly money: The effect of payment coupling and form on spending behavior
. Journal of Experimental Psychology: Applied, 14 (3), 213–25. This is primarily because of the transparency effect and consumer's "

pain of paying The pain of paying is a concept from Behavioral Economics Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these ...

."Soman, D. (2003)
The effect of payment transparency on consumption: Quasi experiments from the field
. Marketing Letters, 14, 173–183. 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. The less transparent or further away from cash the form of payment employed is, the less an individual feels the "

" and thus is likely to spend more. Furthermore, the differing physical appearance/form that credit cards have from cash may cause them to be viewed as "monopoly" money vs. real money, luring individuals to spend more money than they would if they only had cash available. 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 The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

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".

Businesses

may use various kinds of debt to

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

its operations as a part of its overall

corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

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 Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Commerc ...

or principal, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans

, 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 In banking and finance, a bullet loan is a loan where a payment of the entire principal of the loan, and sometimes the principal and interest, is due at the end of the loan term. Likewise for bullet bond. A bullet loan can be a mortgage, bond, note ...

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 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 Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...

investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of in ...

. A

syndicated loan A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers. The syndicated loan market is the dominant way for l ...

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 Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

tool that allows the lead banks

underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...

the debt to reduce their risk and free up lending capacity. A company may also issue bonds, which are debt

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

. Bonds have a fixed lifetime, usually a number of

year A year is a unit of time based on how long it takes the Earth to orbit the Sun. In scientific use, the tropical year (approximately 365 Synodic day, solar days, 5 hours, 48 minutes, 45 seconds) and the sidereal year (about 20 minutes longer) ...

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

coupons In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in ...

) during the life of the bond. A

letter of credit A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...

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 Land development is the alteration of landscape in any number of ways, such as: * Changing landforms from a natural or semi-natural state for a purpose such as agriculture or House, housing * subdivision (land), Subdividing real estate into Lot ( ...

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. In executing a transaction, letters of credit incorporate functions common to giros and

traveler's cheque A traveller's cheque is a medium of exchange that can be used in place of the currency of a country. Each cheque is denominated in a preprinted fixed, round, amount of one of a number of major world currencies; it has two panels for a signat ...

. Typically, the documents a beneficiary has to present in order to receive payment include a

commercial invoice When used in foreign trade, a commercial invoice is a customs document. It is used as a customs declaration provided by the person or corporation that is exporting an item across international borders. Although there is no standard format, the do ...

bill of lading A bill of lading () (sometimes abbreviated as B/L or BOL) is a document issued by a common carrier, carrier (or their Law of agency, agent) to acknowledge receipt of cargo for shipment. Although the term is historically related only to Contract of ...

, 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 application is submitted in order to compensate for numerous outstanding loans. Some amongst those who are heavily indebted often resort to debt consolidation as a means to resolve their financial difficulties. 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 An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

. However, this varies from every claimant, in that their own eligibility for such is entirely dependent on their own overall circumstances; 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. Given the often monetary hardship of contenders, those providing these loans often charge at larger rates of interest than others; This is often critiqued by its opponents, who claim that it is an unfair practice aimed at targeting those who are desperate and often holds arbitrary figures, 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. 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 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. Companies also use debt in many ways for

capital expenditure Capital expenditure or capital expense (abbreviated capex, CAPEX, or CapEx) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered ...

s and other business

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

s produced in their

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s, "leveraging" the return on their equity. This 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

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 Treasuries, serves as a reference point for all other debt. There are deep, transparent, liquid, and open capital markets for Treasuries. 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 The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations. Since the risk-free r ...

" 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. 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 2030 Agenda has a target to address the external debt of highly indebted poor countries to reduce debt distress.

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.

Assessments of creditworthiness

Income metrics

The

debt service coverage ratio The debt service coverage ratio (DSCR), also known as the debt coverage ratio (DCR), is a financial ratio that measures an entity's ability to generate sufficient cash to cover its debt obligations, including interest, principal, and lease paymen ...

is the ratio of income available to the amount of debt service due (including both interest and principal amortization, if any). The higher the debt service coverage ratio, the more income is available to pay debt service, and the easier and lower-cost it will be for a borrower to obtain financing. Different debt markets have somewhat different conventions in terminology and calculations for income-related metrics. For example, in mortgage lending in the United States, a debt-to-income ratio typically includes the cost of mortgage payments as well as insurance and property tax, divided by a consumer's monthly income. A "front-end ratio" of 28% or below, together with a "back-end ratio" (including required payments on non-housing debt as well) of 36% or below is also required to be eligible for a conforming loan.

Value metrics

The

loan-to-value ratio The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In real estate, the term is commonly used by banks and building societies to represent the ratio of the first ...

is the ratio of the total amount of the loan to the total value of the collateral securing the loan. For example, in mortgage lending in the United States, the loan-to-value concept is most commonly expressed as a "

down payment In accounting, a down payment (also called a deposit in British English) is an initial up-front partial payment for the purchase of expensive goods or services such as a car or a house. It is usually paid in cash or equivalent at the time of fin ...

." A 20% down payment is equivalent to an 80% loan to value. With home purchases, value may be assessed using the agreed-upon purchase price, and/or an appraisal.

Collateral and recourse

A debt obligation is considered secured if creditors have recourse to specific collateral. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the

s of the borrower to satisfy their claims.

Role of rating agencies

Credit bureaus collect information about the borrowing and repayment history of consumers. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. In the United States, the primary credit bureaus are

Equifax Equifax Inc. is an American multinational consumer credit reporting agency headquartered in Atlanta, Atlanta, Georgia and is one of the three largest consumer credit reporting agency, consumer credit reporting agencies, along with Experian and T ...

Experian Experian plc is a multinational corporation, multinational data broker and consumer credit reporting company headquartered in Dublin, Ireland. Experian collects and aggregates information on more than 1 billion people and businesses including ...

, and

TransUnion TransUnion LLC is an American consumer credit reporting agency. TransUnion collects and aggregates information on over one billion individual consumers in over thirty countries including "200 million files profiling nearly every credit-active co ...

. Debts owed by governments and private corporations may be rated by

rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may r ...

, such as

Moody's Moody's Ratings, previously and still legally known as Moody's Investors Service and often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its histo ...

Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is co ...

Fitch Ratings Fitch Ratings Inc. is an American credit rating agency. It is one of the three nationally recognized statistical rating organizations (NRSRO) designated by the U.S. Securities and Exchange Commission and is considered as being one of the " Bi ...

, and A. M. Best. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a

credit rating A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government). It is the practice of predicting or forecasting the ability of a supposed debtor to pay back the debt or default. The ...

. Moody's uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. Thus a government or corporation with a high rating would have Aaa rating. A change in ratings can strongly affect a company, since its cost of refinancing depends on its

creditworthiness Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal sum, principal payment, leading to disrupted Cash flow, cash flows and increased Colle ...

. Bonds below Baa/BBB (Moody's/S&P) are considered junk or high-risk bonds. Their high risk of default (approximately 1.6 percent for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on their debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable investment.

Debt markets

Market interest rates

Loans versus bonds

Bonds are debt

, tradeable on a

bond market The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in ...

. A country's regulatory structure determines what qualifies as a security. For example, in North America, each security is uniquely identified by a

CUSIP A CUSIP () is a nine-character numeric or alphanumeric code that uniquely identifies a North American financial security (finance), security for the purposes of facilitating Clearing (finance), clearing and settlement (finance), settlement of tr ...

for trading and settlement purposes. In contrast,

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

s are not securities and do not have

s (or the equivalent). Loans may be sold or acquired in certain circumstances, as when a bank

syndicates A syndicate is a self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest. Etymology The word ''syndicate'' comes from the French language, Fren ...

a loan. Loans can be turned into securities through the

securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...

process. In a securitization, a company sells a pool of assets to a securitization trust, and the securitization trust finances its purchase of the assets by selling

to the market. For example, a trust may own a pool of home

s, and be financed by residential mortgage-backed securities. In this case, the asset-backed trust is a debt issuer of residential mortgage-backed securities.

Role of central banks

Central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

s, such as the U.S.

Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

, play a key role in the debt markets. Debt is normally denominated in a particular

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...

, so it can happen even though the borrower and the lender are using the same

Criticisms

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Some

Islamic banking Islamic banking, Islamic finance ( ''masrifiyya 'islamia''), or Sharia-compliant finance is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economics. Some ...

forbids lending with interest even today. In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events (income loss) or internal difficulties (poor management of resources). Debt with an associated interest rate will increase through time if it is not repaid faster than it grows through interest. This effect may be termed

usury Usury () is the practice of making loans that are seen as unfairly enriching the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in e ...

, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...

accepted. In international legal thought, odious debt is debt that is incurred by a regime for purposes that do not serve the interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. Excessive debt accumulation has been blamed for exacerbating economic problems. For example, before the

Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...

, the debt-to-GDP ratio was very high. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a

credit crunch A credit crunch (a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally ...

followed.

Deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...

effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more

bankruptcies Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

also occurred due both to increased debt cost caused by deflation and the reduced demand. At the household level, debts can also have detrimental effects — particularly when households make spending decisions assuming income will increase, or remain stable, in years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health, family stress, stigma, difficulty obtaining employment, exclusion from basic financial services (

European Commission The European Commission (EC) is the primary Executive (government), executive arm of the European Union (EU). It operates as a cabinet government, with a number of European Commissioner, members of the Commission (directorial system, informall ...

, 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim ''et al.'', 2003), feeling of insecurity, and relational tensions.

History

According to historian Paul Johnson, the lending of "food money" was commonplace in

Middle East The Middle East (term originally coined in English language) is a geopolitical region encompassing the Arabian Peninsula, the Levant, Turkey, Egypt, Iran, and Iraq. The term came into widespread usage by the United Kingdom and western Eur ...

ern civilizations as early as 5000 BC. Religions like Judaism and Christianity for example, demand that debt be forgiven on a regular basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment. An example is the Biblical Jubilee year, described in the

Book of Leviticus The Book of Leviticus (, from , ; , , 'And He called'; ) is the third book of the Torah (the Pentateuch) and of the Old Testament, also known as the Third Book of Moses. Many hypotheses presented by scholars as to its origins agree that it de ...

. Similarly, in

Deuteronomy Deuteronomy (; ) is the fifth book of the Torah (in Judaism), where it is called () which makes it the fifth book of the Hebrew Bible and Christian Old Testament. Chapters 1–30 of the book consist of three sermons or speeches delivered to ...

chapter 15 and verse 1 states that debts be forgiven after seven years. This is because biblically debt is seen as the responsibility of both the creditor and the debtor. Traditional Christian teaching holds that a lifestyle of debt should not be normative; the Emmanuel Association, a

Methodist Methodism, also called the Methodist movement, is a Protestant Christianity, Christian Christian tradition, tradition whose origins, doctrine and practice derive from the life and teachings of John Wesley. George Whitefield and John's brother ...

denomination in the

conservative holiness movement The conservative holiness movement is a loosely defined group of theologically conservative Christian denominations with the majority being Methodists whose teachings are rooted in the theology of John Wesley, and a minority being Quakers (Fri ...

, for example, teaches: "We are to refrain from entering into debt when we have no reasonable plan to pay. We are to be careful to meet all financial engagements promptly when due, if at all possible, remembering that we are to 'Provide things honest in the sight of all men' and to 'owe no man any thing, but to love one another' (Romans 12:17; 13:8)."

References

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