Deadweight Debt

Definition Deadweight Debt. Debt that is incurred but does not create any meaningful asset or spending which might help may the debt off in the future.

For example, if you have a credit card debt with 17% interest, the interest payments on your initial debt will increase your total debt, but, will help in no way to pay off your debt. If you took on debt to buy a car, essential for getting to work. This debt can be used to help you earn more and pay back the debt.

For a firm the same situation applies. e.g. debt on interest payments is deadweight debt. Debt to finance investment isn’t.

Interest rates and deadweight debt

Higher interest rates will increase the percentage of debt which is counted as deadweight debt. This is particularly a problem for people who borrow using credit cards or loan sharks. With these forms of borrowing, debt interest payments can take a high percentage of disposable income. It can also mean that debt service payments all go on interest and do nothing to reduce the capital outstanding.

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