The phrase debt obligation is really just a repetitive way of saying either debt or obligation. When you borrow money from any source, whether it's a bank, a family member or a payday advance, you owe a debt to the person or entity from which you borrowed the money, and that debt is your obligation. The words debt and obligation can be used interchangeably, and they describe the same thing: money you owe to someone else.
Generally speaking, a debt obligation can be define as any sum of money that is owed to a person or institution as part of an earlier exchange for goods or services.
How Debts or Obligations Are Incurred
Debts are typically incurred when you need money for something and you borrow the money to make the purchase. This is true whether you're buying something large, like a car or a house, or simply buying a series of smaller items, such as when you use a credit card to pay for groceries, clothing or trips to the movies. You may borrow the money to help pay your living expenses during school or during a rough time, as often happens with payday loans. Either way, when you incur any type of debt from a financial institution like a bank, you enter into a contract in which the lender promises to loan you money, and in return, you promise to pay it back, usually with interest. Loan contracts are usually in writing and signed by the borrower.
Types of Personal Debt
There are several categories of debt that are common, including home mortgages, car loans, student loans, medical bills and credit card debt.
Some of these debts are secured obligations. This means that in exchange for the money, you agreed to repay it, but you also gave the lender collateral for the loan. Collateral is property that you offer to the lender as security for the loan obligation. If you end up not repaying the loan as required, the lender can take the collateral to satisfy the debt. The most common types of secured debts for individuals are car loans and home mortgages. When you borrow money to buy a house or a car, the bank will put a lien on the property you're purchasing, and if you don't repay, the bank will repossess or foreclose on the property. Ultimately, they may resell the property to gain bank the money they loaned you.
Other debts, like medical and utility bills, most credit cards and student loans, are unsecured debts. Unlike a secured debt, which is guaranteed by some sort of collateral, unsecured debts are not secured by an asset. Because there is no collateral collected from you to protect the lender, the only thing the lender gets in return for giving you the money is your promise to repay the obligation. For this reason, unsecured debt typically has a higher interest rate than secured debt.
- Law Insider: Definition of Debt Obligation
- Debt - Wikipedia
- Good Debt vs. Bad Debt - Types of Good and Bad Debts
- Collateral (film) - Wikipedia
- Experian. "What Is a Secured Loan?" Accessed July 22, 2020.
- Experian. "Secured vs. Unsecured Loans: What You Should Know." Accessed July 22, 2020.
- Engel Law Group. "What Is Unsecured Debt?" Accessed July 22, 2020.
- National Credit Union Administration. "Personal Loans: Secured vs. Unsecured." Accessed July 22, 2020.
Rebecca K. McDowell is an attorney focused on debts and finance. She has a B.A. in English and a J.D. She has written finance and tax articles for Zacks and eHow.