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FINANCE

Credit is the ability to obtain goods or services now with a promise to pay later, creating a debt between a creditor and a debtor. A credit economy relies on borrowing and lending to drive economic activity, offering advantages like funding opportunities and increased government spending, but also risks such as inflation and resource wastage. Key foundations of credit include legal protections, lender confidence, and a stable currency, while credit cards serve as a financial tool with both benefits and drawbacks.

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18 views3 pages

FINANCE

Credit is the ability to obtain goods or services now with a promise to pay later, creating a debt between a creditor and a debtor. A credit economy relies on borrowing and lending to drive economic activity, offering advantages like funding opportunities and increased government spending, but also risks such as inflation and resource wastage. Key foundations of credit include legal protections, lender confidence, and a stable currency, while credit cards serve as a financial tool with both benefits and drawbacks.

Uploaded by

lobmi5461
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1. Define and explain thoroughly. What is credit?

Credit is the ability to obtain goods or services now by promising to pay for it
later with money or something else the seller agrees to accept. It can also be explained
as one party, called the creditor, giving resources to another party, called the debtor,
without getting paid right away. This creates a debt. Instead of paying immediately, the
debtor agrees to repay or return something of equal or greater. time.

2. Define and describe the credit economy.

A credit economy is a system where borrowing and lending are key to


economic activity. It enables people and businesses to obtain goods and services
immediately and pay for them later, helping to drive growth and investment. This
approach can boost spending and business expansion, but it also comes with risks
such as rising prices and increasing debt. Using credit wisely is important to support
economic growth while avoiding financial problems.

3. Enumerate and explain advantage and disadvantages of the credit economy.

Advantages of a Credit Economy:

It generates additional funding.: Credit allows businesses to secure loans using


assets as collateral, enabling growth without selling valuable property. It also helps
companies raise capital through bonds.

It presents opportunity: Entrepreneurs can use credit to start businesses, driving


innovation and economic activity.

It can increase government spending.: Credit enables governments to fund projects


like infrastructure and social programs through loans or bonds.

It benefits the economy.: Credit accelerates production, creating jobs, boosting


income, and driving consumer spending, leading to overall economic growth.

It postpones financial outlay: Credit allows individuals with limited income to access
goods and services like homes, cars, and appliances, improving their quality of life
and contributing to consumer spending.

Disadvantages of a Credit Economy:

Credit may lead to inflation: Excessive government borrowing can increase the
money supply, reducing the value of currency.

It can lead to wastage of resources: Poor credit decisions by governments can result
in wasteful spending and economic inefficiency.

Unlike cash, credit has a pervasive effect: Credit-related failures can ripple through
the economy, affecting businesses and banks, as seen in financial crises.
It can burden the next generation: Excessive government borrowing from foreign
countries can result in future financial challenges and repayment obligations.

It can reduce spending: Heavy debt can make businesses and individuals cautious,
slowing economic growth.

4. Enumerate and explain the foundations of credit.

Assistance: Legal protections for both lenders and borrowers ensure fair lending
practices and prevent exploitative terms.
Confidence: Lenders must trust that borrowers will repay, based on agreements,
collateral, or credit history.
Facilities: A strong credit system relies on institutions like credit bureaus, banks, and
legal frameworks.
Stable currency: A stable monetary value is necessary to ensure reliable loan
repayments and financial stability.

5. Enumerate and explain the basic characteristics of credit.

Involves two parties: Every credit transaction includes a lender and a borrower.
Trust-based: Credit depends on the belief that the borrower will repay as agreed.
Future commitment: Borrowers receive funds immediately but must repay later.
Monetary value: Credit is measured in currency rather than goods.
Risk factor: Lenders face the possibility of non-repayment, which is why they charge
interest.

6. What is a credit card? And explain its advantages and disadvantages.

A credit card is a financial tool issued by banks that allows users to borrow money for
purchases within a set limit. The amount spent must be repaid, and unpaid balances
incur interest.

Advantages:

• Convenient for purchases


• Helps build credit history
• Offers rewards and protection

Disadvantages:

• High interest rates if not paid in full


• Encourages overspending
• Can lead to debt accumulation

7. Enumerate and explain classifications of credit.


a. According to Category User:

● Consumer Credit: This is credit used by individuals for purchases of

commodities or services for personal consumption. It's usually short-term or


intermediate-term.

● Bank Credit: Credit extended by banks to individuals or businesses for

various financial needs, such as personal loans, business expansion, or


mortgages. This type of credit is often secured by collateral.
b. According to Purpose:

• Agricultural Credit: Supports farming activities.


• Industrial Credit: Funds manufacturing and infrastructure.
• Commercial Credit: Helps businesses purchase goods and services.
• Real Estate Credit: Used for property acquisition.
• Export Credit: Assists in international trade.

c. According to Maturity
• Short-term: Due within a year.
• Medium-term: Matures in 1-5 years.
• Long-term: Extends beyond five years.

d. By Repayment Method

• Lump Sum: Paid in full at a specific time.


• Installment: Paid in regular intervals.

e. By Loan Disbursement

• Lump Sum Release: Borrower receives full loan amount at once.


• Installment Release: Funds are given in stages based on progress.

f. By Security

• Secured Credit: Backed by collateral.


• Unsecured Credit/Character Loan: Granted based on borrower’s
creditworthiness.

g. By Credit Granting Method

• Direct Credit: Issued by banks without intermediaries.


• Discount Loan: Interest deducted upfront before loan disbursement.

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