Money and Credit-2 Flashcards
cdefine credit
why exactly
Credit (loan) refers to
an agreement in which the lender supplies the borrower with
money, goods or services in return for the promise of future
payment
explain the process of taking credit in rural areas
In rural areas, the main demand
for credit is for crop production. Crop
production involves considerable
costs on seeds, fertilisers, pesticides,
water, electricity, repair of equipment,
etc. There is a minimum stretch of
three to four months between the time
when the farmers buy these inputs
and when they sell the crop. Farmers
usually take crop loans at the
beginning of the season and repay the
loan after harvest. Repayment of the
loan is crucially dependent on the
income from farming.
what does earning from credit depend upon
In one situation credit helps to
increase earnings and therefore the
person is better off than before. In
another situation, because of the
crop failure, credit
pushes the person into
a debt trap. To repay
her loan she has to sell
a portion of her land.
She is clearly much
worse off than before.
Whether credit would
be useful or not,
therefore, depends
on the risks in the
situation and whether
there is some support,
in case of loss.
what does every loan agreement specify
Every loan agreement specifies an
interest rate which the borrower must
pay to the lender along with the repayment of the principal. In
addition, lenders may demand
collateral (security) against loans.
what is a collateral?
Collateral is an asset that the
borrower owns (such as land,
building, vehicle, livestocks,
deposits with banks) and uses this
as a guarantee to a lender until
the loan is repaid.If the borrower
fails to repay the loan, the lender has
the right to sell the asset or collateral
to obtain payment. Property such as
land titles, deposits with banks,
livestock are some common examples
of collateral used for borrowing.
define terms of credit
Interest rate, collateral and
documentation requirement, and the
mode of repayment together comprise
what is called the terms of credit.The
terms of credit vary substantially from
one credit arrangement to another.
They may vary depending on the
nature of the lender and the borrower
