Debt

The nature and terminology of debt

A voluntary loan agreement may be presumed to confer benefits upon both borrower and lender, and to have no effect upon other parties. The terms of the agreement may be expected to take account of "social time preference", which is an observed tendency to attach greater value to current enjoyment than to deferred enjoyment. That behavioural characteristic confers a benefit on the borrower at the expense of the lender, in return for which the borrower may be expected to compensate the lender by the payment of "interest". The agreement may also be expected to take account of the possibility that the borrower may "default" upon its terms by failing fulfil its obligations concerning the payment of interest or the return of the original payment (termed the "principal"). The agreement may include the provision of "collateral", which gives the lender title to an asset belonging to the lender, if the borrower defaults (the term "mortgage" may be used if the asset is property). Alternatively, or in addition to the provision of collateral, the agreed interest rate may embody a "risk premium" in addition to the appropriate "risk-free interest rate".