Debt is money that a borrower owes a lender. Individuals go into debt when they have a high value need but don’t have the cash on hand to meet that need. Lenders will give a borrower the cash they need to make a high value purchase in the form of a loan. A loan Is essentially a line of credit. You’re borrowing from your future self today in terms of intrinsic value in time via a lender with the expectation that you will be able to pay that debt off with interest sometime down the line.

Loans are often given with an interest rate as a type of insurance in the event that the lender doesn’t get back the full amount of the loan. A lender will determine interest (potential risk) via several factors, most important of which being your credit score (extrinsic trustworthiness). The higher the credit score often times the lower the interest rate (you’re more trustworthy on paper therefore the assumed potential risk of lending to you is considered low). The lower the credit score typically the higher the interest rate (a low credit score suggests you’re a risky borrower and the chances of the lender getting all of their money back is perceived to be less likely. Therefore they require you to pay more during your repayment period, so that they can recoup as much of their money as possible in the event that you default).

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Ken

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