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What Is Private Debt?

Private debt is a form of financing provided by non-bank institutions or investors to private companies, offering a more flexible alternative to traditional bank loans. It encompasses various debt structures, often tailored to the borrower's specific needs. As investors seek diverse portfolios, private debt's role is growing. How might this asset class fit into your investment strategy? Continue reading to find out.
Jessica Ellis
Jessica Ellis
Jessica Ellis
Jessica Ellis

Private debt is money owed by individual people, households, and businesses. It excludes money owed by governments, which is known as public debt. There are many different kinds of private debt, including mortgages, credit cards, student loans, and commercial loans. While taking on debt may be unavoidable in some situations, mishandling debt obligations can lead to dire financial consequences, including bankruptcy and foreclosure.

Most forms of private debt work as a guarantee against future income. If a person doesn't have the money to buy a home or open a business outright, he may be able to secure a loan or credit card that is repaid over time with regular income. If all goes well, he or she will be able to make timely payments to the point where the debt is fully repaid, thereby fully owning the initial purchase. Unfortunately, a variety of factors can intercede to interrupt this ideally smooth repayment process.

The use of private debt can be financially dangerous.
The use of private debt can be financially dangerous.

One factor that must be considered when opting to accept any form of debt is interest. This is a fee tacked on to most loans or credit lines, which allows the process to be profitable for the lender. Without interest, a bank would only be able to lend out what is paid out, without any money generated for expansion, investment, or operations. For the borrower, however, interest can enormously increase the total amount of private debt that must be repaid. Since many loans also rely on variable interest rates, debtors can see payments skyrocket beyond the point of manageability should the interest rate jump.

Credit card debt is part of a person's private debt.
Credit card debt is part of a person's private debt.

Though the use of private debt can be financially dangerous, it can offer opportunities that would otherwise be impossible. Students in many regions have access to college loans that pay for tuition and living expenses, which may be the only means of paying for advanced education for some. Ideally, students can use their education to find a lucrative career that allows them to repay their debt. Unfortunately, if the market changes, demand for a certain type of career plummets, or unemployment rises, a former student may be unable to make payments on his or her debt, leading to the potential for financial ruin.

Mortgages are one kind of private debt.
Mortgages are one kind of private debt.

While private debt can stimulate new businesses, pay for education, or finance the purchase of the home, it is a serious risk that requires careful consideration. Consumers must be fully aware of the obligation they undertake by shouldering debt; it is an obligation that may last years, if not decades. Some financial experts warn of a growing consumer and commercial debt problem in developed countries, where inflation and cost of living increases have lead many individuals to rely more and more on private debt. Many economists also decry governmental regulations on consumer debt, suggesting that they are often all but written by lobbyists for the debt industry, and may be designed to obscure important facts that might influence consumers.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a SmartCapitalMind writer.

Learn more...
Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a SmartCapitalMind writer.

Learn more...

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Discussion Comments

Logicfest

Remember at the turn of the century when the general consensus among economists was that higher levels of consumer debt was a sign of a healthy economy? It would seem we're still emerging from a period in which it was established that too much private debt can be a very bad thing.

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    • The use of private debt can be financially dangerous.
      By: Tyler Olson
      The use of private debt can be financially dangerous.
    • Credit card debt is part of a person's private debt.
      By: Sergey Nivens
      Credit card debt is part of a person's private debt.
    • Mortgages are one kind of private debt.
      By: Brian Jackson
      Mortgages are one kind of private debt.
    • Mishandling private debt can have serious consequences, such as foreclosure of one's house.
      By: Andy Dean
      Mishandling private debt can have serious consequences, such as foreclosure of one's house.
    • Private debt can last for decades.
      By: Monkey Business
      Private debt can last for decades.
    • Private debt includes the cost of replacing a totaled vehicle.
      By: Duncan Noakes
      Private debt includes the cost of replacing a totaled vehicle.
    • Couples may seek out financial counseling to help minimize private debt.
      By: WavebreakMediaMicro
      Couples may seek out financial counseling to help minimize private debt.