Last Updated : 01 Mar, 2024
Debt is an obligation of a party to pay back the money borrowed from another party. Various companies and individuals use debt to make those large purchases that they otherwise cannot afford. It is essential that the debt is paid back to the lender, usually along with the interest. Public Debt and Private Debt are two such kinds of debt.
Table of Content
- What is Public Debt?
- What is Private Debt?
- Difference between Public Debt and Private Debt
What is Public Debt?
Public debt also known as national debt, is defined as a debt that is borrowed by government bodies for the development of the public. The government can borrow debt from national banks such as the Central Bank of India or can also borrow debt from other countries and international banks. The debt taken from foreign banks and governments is known as external debt. In India, the public debt is managed by the Reserve Bank of India. When the government of a country faces a budget deficit, it borrows funds from different sources. Besides the budget deficit, the government also borrows funds for wars, public welfare schemes, infrastructure projects, nuclear programs, etc. In addition to this, the government uses these funds to revive dysfunctional public sector enterprises.
Different types of public debt include Internal debt and external debt, productive debt and unproductive debt, redeemable and irredeemable debt, short and long-term debt, and voluntary and involuntary debt.
What is Private Debt?
Private Debt is defined as the debt or loan provided by private entities such as banks, and private firms, instead of public institutions and government, and is accommodated by an individual, non-government organisation, or by any private business. The basic aim behind private debt is the provision of a source of financing for individuals or companies. Private businesses or individuals can take Private Debt in many forms such as personal loans, business loans, credit loans, and corporate bonds. As a guarantee and for the purpose of security, credit providers ask for security in the form of any asset. Debt taken from credit providers results in high charges for mispayments, security-related issues, and high interest.
Some of the most common types of private debt include corporate bonds, mezzanine financing, senior secured debt, junior debt, asset-based lending, real estate financing, etc.
Difference between Public Debt and Private Debt
Basis | Public Debt | Private Debt |
|---|
Meaning | A debt that is borrowed by government bodies for the development of the public. | The debt or loan provided by private entities such as banks, and private firms, instead of public institutions and government, is accommodated by an individual, non-government organisation, or by any private business. |
Issuer of Debt | Public debt is issued by the public government, public organisations, and central banks. | Private debt is issued by individuals, private businesses, and private banks. |
Debt issued through | Public debt is usually issued through bonds. Individuals and institutions can buy these bonds. | Private debt is issued through loans and debt securities. |
Use of debt | The public debt is used for building infrastructure for the public, and providing public services such as water, home, educational institutions, etc. | The private debt can be used for personal reasons such as development, business expansion, etc. |
Period of Debt | The government can borrow money from the public for a very long time. | A private individual or business can secure private debt for a short period of time only. |
Interest Rates | Interest rates are lower for public debt as compared to private debt. | Interest rates are higher for private debt as compared to public debt. |
External/Internal Sources | The government can borrow money from both external as well as internal sources. Internally, the government can borrow money by printing paper notes. | A private individual or a business can borrow from external sources only. |
Realisation of Capital | In this case, the creditors can realise their capital by selling off government securities in the market. | In this case, the creditors cannot realise their capital by selling off government securities in the market. |
Deduction of Tax | Interest in public debt is usually tax deductible. | Interest for private debt is not tax deductible. |
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FAQs
Public debt is issued by the public government, public organisations, and central banks. Private debt is issued by individuals, private businesses, and private banks. Public debt is usually issued through bonds.
What is the difference between public debt and private debt? ›
public debt, obligations of governments, particularly those evidenced by securities, to pay certain sums to the holders at some future time. Public debt is distinguished from private debt, which consists of the obligations of individuals, business firms, and nongovernmental organizations.
Why is private debt better than public? ›
Debt structures and recovery values
In the private debt markets, almost all issues are secured, thereby reducing the risk for investors. Because private debt is secured, in the event of default, recovery values for private assets are generally much higher than those on the public market.
What is an example of a private debt? ›
When a privately-held company takes out a business loan, or when an entrepreneur borrows money from a family member, those are both examples of private debt. Private debt can take many forms, but commonly take the form of credit card debt, corporate bonds, business loans, or personal loans.
How is personal debt different from government debt? ›
Differences include that governments can print money, interest rates on government borrowing may be cheaper than individual borrowing, governments can increase their budgets through taxation, governments have indefinite planning horizons, national debt may be held primarily domestically (the equivalent of household ...
How do private debt funds make money? ›
While a private equity fund may generate returns by increasing the value of the company it invests in, a private credit fund's returns are achieved primarily through its receipt of interest on the loans it extends and through the sale or repayment of such loans.
Is public debt good or bad? ›
A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.
Is private debt good for the economy? ›
Private debt has the potential to provide higher current income and returns than comparable below investment-grade fixed-income alternatives through taking advantage of the illiquidity premium, or the potential for excess return for investing in assets that cannot easily be converted into cash.
How risky is private debt? ›
During an economic slump default rates might spike as firms struggle to pay their debts. It is also important to bear in mind that companies relying on private credit may have been previously denied lending by a bank, meaning they have a greater risk of default. The second significant risk is illiquidity.
What are the disadvantages of private debt financing? ›
Disadvantages
- Qualification requirements. You need a good enough credit rating to receive financing.
- Discipline. You'll need to have the financial discipline to make repayments on time. ...
- Collateral. By agreeing to provide collateral to the lender, you could put some business assets at potential risk.
Today, private debt has become a must-have alternative to bank loans for intermediate-size companies, and especially those interested in consolidating their market position and needing to use their cash to fund acquisitions.
What is another name for private debt? ›
Private debt – also known as private credit – is a private capital strategy in which investment managers and institutions invest by making private, non-bank loans to companies.
Are bank loans private debt? ›
Private debt, or private credit, is the provision of debt finance to companies from funds, rather than banks, bank-led syndicates, or public markets.
Who does the US owe the most money to? ›
Who does the United States owe the most debt to? As of July 2020, Japan overtook China and became the largest foreign debt collector for the U.S. The United States currently owes Japan about $1.2 trillion according to the U.S. Treasury report.
What is the main difference between public and private debt? ›
Public debt is issued by the public government, public organisations, and central banks. Private debt is issued by individuals, private businesses, and private banks. Public debt is usually issued through bonds. Individuals and institutions can buy these bonds.
What country is in the most debt? ›
Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP.
What are the differences between public and private debt quizlet? ›
Private debt is less liquid but avoids the cost and delay of registering with the SEC. Public debt is more liquid but has disclosure costs associated with it.
What is the difference between public debt and government debt? ›
Public debt, sometimes also referred to as government debt, represents the total outstanding debt (bonds and other securities) of a country's government. It is often expressed as a ratio of Gross Domestic Product (GDP).
What is considered public debt? ›
Public debt refers to the amounts owed by the different levels of government and used to finance public deficits resulting from a higher level of program spending to budgeted income.
What is the difference between the public debt and the public deficit? ›
To pay for a deficit, the federal government borrows money by selling Treasury bonds , bills , and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities.
