Financial Terms You Should Know

08 Sep, 2019 - 00:09 0 Views

The Sunday Mail

Debt Consolidation: Debt consolidation means combining more than one debt obligation into a new loan with a favourable term structure such as lower interest rate structure, tenure, etc. Here, the amount received from the new loan is used to pay off other debts.

Description: Debt consolidation is used by consumers to pay off a small debt in one go by taking one big loan. By doing this, they save on interest as well as the finance cost of the small loan owed by them.

The borrower would now have to make one payment instead of making multiple payments to other creditors.

Debt consolidation can happen on debts which are not tied up to an asset. Education loan, amount owed on credit card and personal loan are some examples of unsecured loans, which can come under debt consolidation.

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Contingent Liability: A contingent liability is defined as a liability which may arise depending on the outcome of a specific event. It is a possible obligation, which may or may not arise depending on how a future event unfolds. A contingent liability is recorded when it can be estimated, else, it should be disclosed.

Description: A contingent liability is a liability or a potential loss that may occur in the future depending on the outcome of a specific event. Potential lawsuits, product warranties, and pending investigation are some examples of contingent liability.

If the amount can be estimated, the company sets aside that amount separately to be paid out when the liability arises. Contingent liability as a term does not apply only to companies, but to individuals as well.

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Debt Finance: When a company borrows money to be paid back at a future date with interest, it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance a working capital or an acquisition.

Description: Debt means the amount of money which needs to be repaid back and financing means providing funds to be used in business activities. An important feature in debt financing is the fact that, you are not losing ownership in the company.

Debt financing is a time-bound activity, where the borrower needs to repay the loan along with interest at the end of the agreed period. The payments could be made monthly, half yearly, or towards the end of the loan tenure.

Another important feature in debt financing is that, the loan is secured or collateralised with the assets of the company taking the loan. This is usually part of the secured loan. If the loan is unsecured, the line of credit is usually less.

If a company needs a big loan then debt financing is used, where the owner of the company attaches some of the firm’s assets and based on the valuation of those assets, loan is given.

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