Credit Flashcards
“Credit is a system whereby a person who can’t pay, gets another person who can’t pay, to guarantee that he can pay”
Charles Dickens (Little Dorrit)
Contract agreement in which a borrower receives a sum of money or something of value and repays a lender at a later date, generally with interest or risk financial or legal penalties
Credit
Most common form of buying on credit
Credit cards
A potential that a contractual party will fail to meet its obligations in accordance with the agreed terms
Credit Risk
Nature/Characteristics/ Elements of Credit
Credit is a bi-partite or two-party contract
Credit is elastic
Credit involves the presence of trust of faith
Credit involves risk
Credit involves futurity
Source of credit
Creditor
Credit can increase or decrease by the creditor based on what?
Performance of the debtor
Basic element of credit is the creditor’s reliance on both the debtor’s ________
ability and willingness to pay
As to maturity
Short Term (within 1 year)
Medium Term (1 to 5 years)
Long Term (more than 5 years)
As to payment interest
Ordinary
Discount
As to source
Public: Government
Private: Commercial enterprises, banks and other financial institutions
Interest is paid together with the principal in maturity date
Ordinary
Interest is automatically deducted from the principal at the time it is granted
Discount
As to method of release
Lump-sum
Installment
As to source of payment
Self-Liquidating
Non-self-liquidating
Payment came from the income use of principal
Self-Liquidating Credit
Payment came from income or salary of debtor
Non-self-liquidating
As to purpose
Commercial
Agricultural
Industrial
Personal
Real Estate
As to loan user
Commercial
Agricultural
Industrial
Personal Consumer
Real Estate
Public Utility
Services
Export
As to security
Secured
Unsecured
Importance of Credit
Credit is an agent of production
Credit is a liquidity medium
Credit is a medium of capital formation
Credit develops salability of goods and services
Credit compliments monetary system
Credit is a tool for redistribution of wealth
Credit helps in creation of business
Credit motivates higher business standards and practices
Credit increase purchasing power
Credit makes it possible to attain growth and progress
Refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value of principal amount
Loan
Thou shall make sure that the company/persons you are lending to is of outstanding character
Character
Thou shall ensure that the company/person are lending to have the capacity to repay the term
Capacity
Adequately capitalized
Capital
Thou shall underwrite all loans understanding that business and economic conditions can and will change
Condition
Overemphasis on net worth and past performance
Complacency
Thou shall make sure that collateral does not drive lending decisions
Collateral
“Don’t worry about the loan documentation,I’ll get it later”
Carelessness
Poor communication up and down the line is deadly
Communication
Be correct 99.5% of the time
Contingencies
Thou shall not be swept away by competition
Competition
