Finance: What is Debt?

What is debt? IOU. That's debt. You borrowed money. You owe a principal to be paid back n years later. Plus interest. Or the rental price per year of that money you borrowed, and promised to pay back. If you don't, usually those who loaned you the money then take possession or ownership of your company.

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Transcript

00:32

and buy a home credit cards are golden or plastic

00:35

tickets that let you easily borrow relatively small amounts of money to you

00:40

know buy stuff so there are tons of types of debt and to really understand [lots of examples of debt]

00:44

it all you have to think about debt from both sides of the equation that is you

00:49

as the borrower want the most flexible payback terms the cheapest interest

00:54

rates to rent that money and the least amount of grief if you're ever late on a

00:58

payment but what if you're the lender well you only have so much money to lend [woman walking and approaches a vault of cash]

01:03

and you want to maximize your returns while being smart about risk that is if

01:07

you loan 10 grand to 10 people and 9 of them pay you a fat 10% a year but one of [woman at a stand giving loans to people]

01:12

them absconds with your money to Brazil with senorita maracas well then

01:17

all your work was for nothing more or less when the interest just paid back

01:21

the lost principal on the one who absconded and yeah one bad loan can wipe

01:26

out the returns of your entire portfolio your billion bucks was supposed to produce [Man falls in water while surfboarding]

01:30

a hundred million in interest gains but when one of the ten hundred million

01:34

dollar investments died and well you ended up sitting on a billion and that's

01:39

it so no jet for you so would you loan money to your slacker friend Flaky McGee [Flaky McGee and Bill Gates together]

01:45

for the same rent as you lend to Bill Gates while Flaky McGee has a history of

01:50

you know flaking hence the name. so you'd have to take the risk of him [Flaky McGee in the kitchen with his Mom]

01:54

not paying you and you'd have to track him down in Rio or get lawyers to take

01:58

possession of the skateboard collateral he pledged for the loan and then sell it [Lawyers taking Flaky McGee's skateboard as collateral]

02:02

on eBay and hopefully get most of your money back

02:05

we'll go on record saying that you'll likely charge Flaky McGee a lot more in

02:09

interest and make the terms and conditions much more brutal than you [Terms and conditions for Flaky's loan]

02:13

would for dear old Bill well one big thing people don't seem to understand is

02:17

that debt is just about someone renting money debt does not involve ownership of

02:24

anything other than the promissory paper that contractually outlines the debt

02:28

terms the only time debt does involve ownership is when the piece of paper has [Flaky sat on a toilet]

02:32

been well you know made into toilet paper because the debtor flaked and

02:36

didn't pay back the loan that they promised to pay at that point the one

02:40

who loaned the money usually has every right to take back the collateral [Man drives car away from Flaky]

02:44

pledged behind the debt and if that collateral can't be found to break knees

02:49

you know the guys with the baseball bat remember? you ever see The Sopranos well so [Flaky screaming while on the toilet]

02:55

if you ever find yourself in that position make sure to you know hide your

02:59

knees