What is debt? What is bad debt?

There are many people using loan programs, credit cards, debit cards from banks / credit institutions because of the benefits it brings in life.

However, many people do not fully understand what the term “Debt” is. Many people simply understand that the debt will be equal to the current loan amount and must be paid to the bank.

Such a way of understanding is completely incomplete and is likely to cause confusion between the borrower and the lender when it comes to repayment.

Today’s article will help you fully understand what is debt and credit balance?

To many people, the debt is still an unfamiliar concept. And participants in the bank’s financial products are only interested in information related to how much they can borrow, along with the associated benefits, but accidentally ignore the phrase accompanying debt.

What is debt? What is credit outstanding credit?

Debt balance is the amount of money that people are borrowing from the bank up to a certain time from many sources such as credit cards, loan products, home loans, car loans, loans mortgage,….

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When you pay off your debt to the bank, your balance will be zero. In the financial sector, there are many concepts related to outstanding loans such as initial balance, declining balance, overdue balance, debt collection, loan sales. The following section will help you learn about the differences between these concepts to avoid confusing them together.

Credit balance (also known as loan balance) is the total amount of money you borrow (the principal balance) and the amount of interest that is incurred over the life of the loan (debt). Usually at the time of the loan, the credit balance is the amount that you are disbursed by the bank and stated on the agreement of the two parties (credit contract or request for disbursement of each disbursement).

Over a period of time, if you pay off the principal gradually, the principal balance will decrease with the portion you have paid, the debt will also decrease on the basis of the reduced principal balance, from which the credit balance decreases and vice versa.

Note that the interest here includes both the regular loan interest and the overdue interest when you fail to pay your loan on time.

Outstanding credit can be a basis for banks and economic organizations to assess your business performance, reputation. If the company does not have many projects or contracts but the debt growth is too great, is it due to pressure from suppliers, or the decline in reputation of your company leads to the change of deferred payment terms. change .vv …

At the same time, your outstanding credit also helps your bank evaluate your credit history and reputation in the process of repaying your loans. As you all know, debt is divided into many categories: qualified debt, special attention debt, doubtful debt that is likely to lose capital, etc. Debt balance up to a certain time will be divided into the above types of debt groups, thereby helping credit institutions assess your reputation. When debt is due and you cannot pay, you will incur a late penalty fee and your credit history will have bad debt. Depending on the level of bad debt, it will be difficult for you to get a mortgage loan in the future.

Some definition related to debt

Original outstanding balance

Original outstanding debt is the amount borrowed from the customer at the first time of disbursement. You need to differentiate between the bank approved loan limit and the original balance. Loan limit is the maximum amount you are loaned by the bank, and the initial balance may be smaller, meaning you can borrow less than the limit you are granted.

Amortizing loan

The reducing balance is the debt after you have paid part of your original balance. The interest rate on the declining balance is one of the most popular methods of interest calculation at the bank, which means the bank will charge interest on the existing debt, not on the original debt of the entire loan term.

For example: your initial balance is 500.000 PHP, interest rate 10%, loan term is 5 years. Interest will be calculated monthly at 10% / year over PHP 500.000 of debt. 1 year later, if you pay 100.000 PHP, your debt will be reduced to 400.000 , the interest calculation will be 10% of the debt of 400.000 PHP for the following months.

See also: Amotizing loan definition from Wikipedia

Overdue debt

Overdue balance means a debt that includes both capital and interest that a borrower must pay when due but fail to pay or fail to pay on time. When overdue, the loan balance will be classified into groups of bad debts.

Reference: What is bad debt? Bad debt groups

Debt collection

Debt collection is the total amount the bank / credit institution has collected from loans or the total amount that the customer returns to the customer in a certain period of time.

Loan sales

Loan sales are the sum of all the money the bank has made over a period of time.

Ways to pay off your balance

  • Cash deposit directly at the bank: Customers can go to any of the nearest transaction points of the bank that they register to pay the outstanding balance.
  • Signing a check or money order: In developed countries, people often choose to sign a check or a payment order with a signature to send a bank request to pay the balance of the credit card. However, in Philippines, this form of payment has not been widely disseminated.
  • Automatic debit: You just need to sign up for automatic debit service and the bank will actively transfer money from your checking account to your credit account. And you can completely choose for yourself the form of partial payment or full payment of the outstanding balance.
  • Debt payment by bank transfer: This is considered the fastest and most convenient method of debt payment that many people prioritize. You can perform bank transfers at counters, ATMs or via electronic banking.
how-to-pay-debt

What will the consequences of overdue debt?

When your credit debts are overdue, the bank will remind in advance by a late payment penalty of about 5-6% of the amount you owe, and your overdue interest is usually about 1.5 times the normal interest. If your loan is large, it will lose a lot of money just to pay interest.

When you owe too long and fall into the bad debt group or more, the consequences will be very serious. As follows:

You do not have the opportunity to borrow any cash loans, unsecured loans, or consumer loans at all banks, legal and reputable financial institutions.
Do not use credit cards.

Even if you pay in full after too long overdue it takes a long time for the financial institutions to approve the application.

See also: What is CIC? Guide to look up personal bad debt on CIC

You should remember that information about your bad debt balance is not only about you and the bank that lent you, but it will be communicated to the state-owned banking system so that other credit institutions can see it. You should never avoid your liability, because it does the most damage to yourself.

At the same time, you risk losing your collateral for your bank loan if you do not pay the loan in full.

The consequences are extremely serious, so it is advisable that you control your outstanding balance, give overall options on how much you will borrow, pay off monthly, quarterly principal or interest. how every year, whether or not their income is enough to avoid overdue in the loan process.

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