By John Carney, Senior Editor, CNBC.com NEW YORK (CNBC) -- Debt has become such an important feature of so many aspects of our lives that it is worth expending a bit of effort on understanding the basic operations of debt.
So today let's look at the question: why does anyone repay their debt? This might seem like a dim question. People repay their debts because they made a repayment promise when they borrowed money. They incurred a duty -- legal and moral -- to make payments according to a repayment schedule. The lender only agreed to extend the loan on promise of this repayment. More from CNBC Ready to Short LinkedIn Stock? It Won't Be Easy, Or Cheap If You're Married to a Banker, There's a 72% Chance He or She Cheated on You The Charms of DSK But there's something a bit thin to this way of looking at things. It no doubt explains a lot about why we repay our debts in good times. But when times are tough, often our obligations to our creditors interfere with other legal and moral obligations -- such as providing for our families, or even paying off other debts. To put it a bit abstractly, in a world of unlimited abundance, the choice to pay off debt is obvious and easy. In a world of scarce resources, it is more difficult. So the question really is why we choose to meet certain obligations rather than others? It helps to think about debt not a single loan and repayment transaction -- but as a series of purchases. The lender purchases a promise to pay -- and perhaps security rights in collateral -- in exchange for a special kind of payment called a loan. The borrower purchases back this promise to pay -- and perhaps security rights in collateral -- with a special kind of payment called a "repayment." What Is a Mortgage? When you take out a mortgage, for example, you are really selling something to the bank -- security rights in your home and your promise to pay the loan back with interest. When you make payments on your mortgage, you are working toward the total repurchase of those security rights on an installment plan. While you are making those payments, you are also purchasing the right to continue to reside in your home. Eventually, you pay off your mortgage and complete the repurchase of what you sold to the bank. Add Comment Tweet 1 2 3 Last » Next › adsonar_placementId=1341527;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=600;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; try { function DM_onSegsAvailable(segs, cust_id) { for (var i=0;i //* Global Functions *// function metadataRegisterNS(ns){ var nsParts = ns.split("."); var root = window; for(var i=0; i Dow Jones S&P 500 NASDAQ 10-Year Note 12,391.06 1,319.02 2,761.85 31.16 Oil * 114.82 UP 34.85 UP 2.74 UP 15.69 DOWN 0.07 10 Yr 3.12% SPDR Gold 148.68 +0.28% +0.21% +0.57% -0.22% Data delayed 20 minutes Most Popular Stories and Tools var randnum = Math.floor(Math.random() * 100) if (randnum < 45) { document.write("Ex-Dividend Date Calendar"); document.write("Cramer's Latest Picks from Mad Money"); document.write("Bank Safety Ratings and Screener"); document.write("Top-Rated Stocks"); document.write("Highest-Yielding Dividend Stocks"); document.write("Warren Buffett's Portfolio"); } else { document.write("10 Best Dow Dividend Stocks"); document.write("Top 10 'Buy'-Rated Stocks Under $5"); document.write("10 Cities Unaffected by a Bad Economy"); document.write("13 Ugliest Phones of the Mobile Era"); document.write("10 Celebrities Who Lost Big Financially"); document.write("Paulson's 10 Best New Investment Ideas"); } Twitter Facebook RSS Mobile App adsonar_placementId=1341369;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=320;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; Brokerage Partners Free Newsletters from TheStreetAfter the Bell
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