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• Credit is the ability to obtain a thing of value in exchange for a promise to pay a definite sum of money on demand or at a future determinable time
• Characteristics of credit:

  • Bi-partite or two-party contract involving debtor and creditor
  • Elastic, can be increased or decreased by the creditor
  • Relies on trust and faith in the debtor's ability and willingness to pay
  • Involves futurity, with a maturity date for settlement of obligations
• Foundations of credit:

  • Confidence in the debtor's personal character
  • Proper facilities like credit information and credit documents
  • Stability of monetary standard
  • Government assistance and regulations
  • Credit risk borne by creditors
• Five C's of Credit during evaluation:

  • Character: debtor's personality and credit rating
  • Capacity: willingness and capacity to pay based on income level
  • Capital: debtor's real and personal property as a foundation for credit approval
  • Collateral: something of value or debtor's assets used as pledge
  • Conditions: local business or economic conditions during loan application
• Classifications of credit:

  • Consumer credit: used by individuals for personal consumption, can be in the form of charge accounts, installment accounts, revolving credit, or lay-away plans
• Commercial credit is extended by one businessman to another, with objects of credit being merchandise or goods delivered on consignment basis or under a credit term
• Commercial bank credit differs as the creditor is a commercial bank and the debtor can be a business firm or private businessman
• Investment credit is extended by banks to companies intending to purchase fixed assets like land, buildings, or equipment for business use
• Agricultural credit is a loan for acquiring fertilizers, pesticides, seedlings, transportation of agricultural products, and farm improvements, with debtors being farm breeders and creditors being rural banks
• Export credit uses letters of credit (LC) for financing international trade, with two general types: import LC and export LC
• A real estate loan is intended for the purchase of a house and lot, house construction, or home improvement
• Industrial credit is intended to finance industries like logging, fishing, mining, and quarry
• Short-term loans are payable within one year, intermediate-term within one to five years, and long-term beyond five years
• Sources of credit include private individuals, retail stores, pawnshops, savings and mortgage banks, mutual savings banks, savings and loan associations, credit unions, insurance companies, pension funds, bond and money market funds, sales finance companies, and banks