A.

Methods of Establishing the credit

 Meaning of Credit
- Credit is a contractual agreement in which a borrower receives something of value now
and agrees to repay the lender at some date in the future, generally with interest. The
term also refers to the borrowing capacity of an individual or company.
- Agreement between a buyer and a seller in which the buyer receives the good or service
in advance and makes payment later, often overtime and usually with interest.
- The term loan actually comes from the Latin, “yatiu credere” which means trust.
According to origin , the credit means “trust”. Therefore, the trust became one of the
most important factor in a credit process.

Key points about credit:

Credit = ability to borrow
Lenders need trust in you
Borrowings means responbility
You must repay
Loan payments, interest, fees
Goal: Good credit history

Benefits of having credit:

- The option of buying something today and paying the money back over time,
rather than having to wait.
- The flexibility to act on major purchases and life opportunities that may require
more money than you have on hand right now, like buying a computer, or
borrowing for college.
- Easier to rent an apartment and to get sevice from local utility companies.
- Easier to buy what you want, when you want it.

Credit Risk Zone

- Overdoing it; borrowing more than you can afford to repay
- If you don’t make your payments on time, you’ll damage your credit record
- Losing money on late fees
- Having to pay additional interest
- Difficulty getting loans or d=credit in the future.

General Guideline:
1. Never borrow more than 20% of your yearly net income.

Elements of Credit:
- Trust
- Period
- Achievement
- Risk

Elements of Credit:
1. Two-party contract the 2 parties are borrower (debtor) and the lender (creditor)
 2. Presence of Trust. Implies that the creditor has faith in the ability and wiliness of a debtor to
fulfill obligations.
3. Time of Payment. Borrower has an obligation to pay debt at a definite time or date.
 Function of Credit
- Enhance the usability of the money.
- Increasing the amount of money in circulation and traffic of money.
- Increasing the value or usability of the goods.
- Increasing the circulation or distribution of goods.
- As a means of supporting economic stability.
- Activate and enhance the usefulness or the existing economic potential.
- As one of the bridges increase the national income distribution.
- As one means to establish international relations.
 5 C’s of Credit
Character - When lenders evaluate character, they look at stability – for example
how long you’ve lived at your current address, how long you’ve been in
your current job, and whether you have a good record of paying your
bills on time and in full. If you want a loan for a business, the lender may
consider your experience and track record in your business and industry
to evaluate how trustworthy you are to repay.
Capacity - refers to considering your other debts and expenses when determining
your ability to repay the loan. Creditors evaluate your debt-to-income
ratio, that is, how much you owe compared to how much you earn. The
lower your ratio, the more confident creditors will be in your capacity to
repay the money you borrow.
Capital - refers to any assets of a borrower (for example, a home) that a lender
has a right to tke a ownership of and use to pay the debt if the borrower
is unable to make aloan payment as agreed.
Condition - lenders consider a number of outside circumtances that may affect the
borrower’s financial situation and ability to repay, for example what’s
happening in the local economy. If the borrower is a business, the
lender may evaluate the financial health of the borrower’s industry,
their local market and competition.

Characteristics of CC
Be-partite contract In any credit transaction, there are two parties
involved. The person giving away things of
value for the present is known as the creditor.
The person receiving the things and promising
to pay in the future is known as the debtor.
Debtor can stress his oblgation or duty to fulfill
his promised.
Pecuniary Contract Although the things borrowed are goods and
services, the payment is measured in terms of
monetary unit. Furthermore, the final
settlement of the transaction is in terms of
money. It is also said that pecuniary contract
involved monetary penalty or entailing a fine if

Legal Obligation
it has the fiduciary elements
It is based on personal factor
the payment for credit is not met.
The credit contract creates the right of the
creditor to collect from the debtor. The debtor
in effect obtains possession and title to the
things borrowed and therefore obliges him to
pay. The creditor then acquires a right of
recourse against the debtor upon default of
payment
The credit contract is based on trust.
Furthermore, the present of futurity and risk
makes it border on uncertainties. Therefore, it
is important that faith on the borrower’s
ability and willingness to pay exist.
Since credit inherent in the person, the
contract is perfected based on the person’s
degree of moral as well as business
competence. This is known as credit standing.
It might be recalled that the creditor accepts
the debtor’s credit because he believed that he
is willing and able to pay.