DEBT AND CREDIT What is debt? The total amount of money you owe someone else. Banks Person Business Government IRS Collection Agencies What are loans? A sum of money borrowed for a specific purpose under specific terms. Specific Purpose Buying a car, house, boat, etc Education Make bills Specific Terms Time frame Interest Charged What is credit? Depends on context Can mean loan, qualifications, income, refund, etc. For our purposes: Your personal or corporate ability to obtain loans. Your “credit” is simply a measurement of risk What is the purpose of debt/credit? My favorite word in finance: LEVERAGE To utilize more capital than you physically have in reserves. What is the benefit of using leverage? What are the pitfalls of using leverage? Who uses credit/debt? How? Why? Government Businesses Banks You Who gets to use leverage? Well, that depends upon the risk Lending money is simply a gamble on the risk the lender is willing to take on the lendee paying the loan back. If you are a good credit risk lenders will give you vast amounts of “money” at a reasonable rate of interest. If you are a bad credit risk lenders may still give you some money, but if they do, it will be at a much higher price. How are credit risks measured? Responsible lenders will look at your: Income Assets DTI– Debt to Income Ratio Credit Score Public Records Bankruptcies Judgments Foreclosures Recap Questions Debt vs Loans What is credit? Who uses credit and why? How do lenders determine who to loan money to? What are the lenders qualifications?