Outstanding debt is the total amount of money (including interest and fees) that is owed to a lender or creditor. Outstanding debt often continues accruing interest until it’s paid off.
What Is Outstanding Debt?
If you’ve ever taken out a loan or used a credit card, you’re sure to have experienced outstanding debt. When you make all the required monthly payments on your loan or credit card, you’ll usually also notice that the total amount you pay back is more than the amount you received.
A clear understanding of outstanding debt is important for both companies and individuals. A company that manages its debt well can have more freedom to get other loans if it needs refinancing and a potentially healthier cash flow. That’s because the cash flow will be available for company use rather than paying off debts.
How Does Debt Work?
Outstanding debt arises when a lender gives a borrower an amount of money to be repaid in the future by the borrower, often with interest and fees. Either an individual borrower or business may hold outstanding debt.
The overall cost of debt includes interest on the debt charged by the lender and other fees. The interest rate (interest expressed as a percentage of debt) will vary based on your creditworthiness, the type of debt, the duration of debt repayment, and other factors. Applicable fees vary based on the lender, the type of debt, the agreement between a lender and borrower, and other factors.
What is Interest on Debt?
Interest is part of the cost of debt, and it is separate from lender fees. Interest is an extra sum of money that you owe on your debt, added on to the amount you receive from a lender. Interest is typically charged as a rate. Therefore, the interest rate accrues as a set percentage of the amount you borrow over the period of debt. Some lenders may charge interest as a flat fee.
The interest rate is different from the annual percentage rate (APR). For most forms of debt, the APR measures the total cost of your debt (including the interest rate and applicable fees) if the debt would be outstanding for a year. Therefore, APR reflects the true cost of borrowing.
What are Lender Fees Charged on Debt?
When lenders give you money in the form of debt, they usually charge various fees for processing and funding the loan. You’ll pay the lender fees when repaying your debt; therefore, such fees contribute to the total amount of your borrowing costs. The specific types of fees charged vary based on the type of debt, the lender, and other factors.
Some lender fees include:
- Application fee – Combines the costs of document preparation, processing, and review.
- Brokerage fee – Accrues if you apply for a loan through a broker.
- Closing fee – May include a brokerage fee, the lender’s commission, and other associated application costs.
- Commitment fee – Makes up for any interest the lender could be charging on a loan that isn’t immediately funded.
- Document preparation fee – A fee to offset the costs of drafting documents related to processing a loan.
- Processing fee – Covers the cost of credit checks and underwriting.
- Paper copy fee – A fee by online lenders if you request a physical copy of the loan agreement.
- Underwriting fee – Covers the cost of underwriters who assess the level of risk a lender is potentially taking on with a borrower.
- Credit insurance fee – In the event of unexpected personal tragedy or hardship, insurance may help you cover payments that you might have missed.
- Origination fee – Covers the costs associated with your application process.
- Check handling fee – Offsets the cost of dealing with physical checks.
- Collection agency recovery fee – Covers the costs of the services of a collection agency.
- Nonsufficient funds (NSF) fee – Charged if your repayment doesn’t go through or is returned for insufficient funds.
- Electronic payment processing fee – Offsets the cost of one-time electronic payments.
- Late payment fee – Charged when your repayment is received past the due date.
- Payment convenience fee – Charged when you pay by debit or credit card instead of direct payments via ACH or a physical check.
- Prepayment fee – Covers the interest that a lender would have collected over the life of your loan.
- Annual fees – Covers the cost of maintaining your account.
- Ongoing administration fees – Includes loan service fees, online connection fees, ongoing monthly fees, and more.
What are the Different Kinds of Debt?
Outstanding debt may come in two key forms:
- Secured debt – Debt that requires collateral from the borrower to secure funding. The collateral serves as security for the lender. The collateral can be repossessed or foreclosed upon if the funding is not repaid as promised.
- Unsecured debt – Debt that doesn’t require collateral from the borrower; approval for this type of debt is more focused on the borrower’s credit worthiness.
Lenders generally choose to structure debt in these common ways, but there are other options as well.
- Loan – A lump sum amount to be repaid in installments. The option for credit ends when you fully repay the loan. Loan agreements are typically close-ended, as lenders set a specific date by which you should pay back the loan in full, plus fees and interest.
- Open line of credit/revolving line of credit – A credit facility extended by a lender to a consumer, which enables the customer to draw various amounts on the line of credit whenever the customer needs funds, up to a set maximum limit. The available credit is replenished whenever you repay the borrowed amounts. Some examples of open lines of credit are credit cards and home equity lines of credit (HELOC).
Under the loan category, multiple options exist, including:
- Personal loans
- Auto loans
- Personal loans with a co-signer
- Joint personal loans
- Personal loans for bad credit
- Peer-to-peer loans
- Payday alternative loans (PALs)
- Payday alternative loan II (PAL II)
- Car title loans
- Invoice financing
- Equipment financing
- Purchase order financing
- Hard money loans
- Short-term loans
- Loans from family members or friends
- Payday loans
- Merchant cash advance (MCA)
What is a Debt-to-Income Ratio?
Your debt-to-income ratio is a key aspect lenders use to measure your ability to fulfill your monthly payment obligations for the money you plan to borrow. To calculate your debt-to-income ratio, divide all your monthly debt payments by your gross monthly income.
To get your monthly debt payments, add up all your monthly debt payments. Your gross monthly income is the money you earned before taking out taxes and other deductions.
For example, if you have a $1,500 monthly mortgage payment, a $100 monthly auto loan payment, and $400 worth of payments for the rest of your debts, your total monthly debt payment is $2,000 ($1,500 + $100 + $400 = $2,000). If your monthly income before taxes and deductions is $6,000, then your debt-to-income ratio is 33% ($2,000 ÷ $6,000) x 100% = 33%).
Many lenders prefer a debt-to-income ratio below 36%.
How Does Debt Affect Your Credit Score?
Your debt impacts 30% of a FICO Score. Having debt doesn’t necessarily mean that you’re a high-risk borrower or that you’ll have a low credit score. However, using a high percentage of your available credit can indicate that you’re overextended and likely to delay or miss payments. This may negatively affect your credit score.
Therefore, maintaining a reasonable amount of debt that you can comfortably pay may help you keep a good credit score. In turn, a good credit score increases the likelihood of getting approval on your loan applications.
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