Professional Documents
Culture Documents
Lesson 7
Dr. Babylyn Y. Vitug
WHAT IS A CREDIT?
1. Contractual agreement
The borrower receives something of
value now and agrees to repay the
lender sometime in the future
Note: Credit is useful because consumers do not always have cash-
on-hand to pay for high-value items, such the use of credit cards.
Also known as a “deferred payment agreement.”
WHAT IS A CREDIT?
2. Amount of money available to borrow
Note: This is the idea behind a “credit limit” for credit cards.
3. Accounting entry
DECREASE in assets &
INCREASE in liabilities and EQUITY
Note: Credit is always a liability since it is something you OWE.
PARTIES INVOLVED
CREDITOR DEBTOR
or LENDER or BORROWER
Supplies money, Receives money, goods,
goods, services, or services, or securities by
securities in exchange promising to pay the
of promised future other party at a set time
payment by other in the future
party
ELEMENTS
Level of confidence the bank has as lender of
TRUST accomplishment given to debtors to repay the
mortgage according to a predetermined time period
CAPACITY
• Borrower’s ability to repay a loan
• Borrower’s income is assessed against recurring debts with the use
of debt-to-income ratio
• Lenders also assess the length of time an applicant has been
at his job and job stability
CAPITAL
• Refers to borrower’s net worth
• How much they own versus less how much they owe
COLLATERAL
• Any asset owned by the borrower (i.e. house) that a lender
has right to take ownership of and use to pay the debt if the
borrower is unable to make the loan payments as agreed
• Helps borrower secure loans
CONDITIONS
• Interest rate and amount of principal which influcences the lender’s
desire to finance the borrower
• Also refers to how the borrower intends to use the money
CLASSIFICATION based on type of transaction
CHARGE ACCOUNT
• Consists in the granting of credit on the mere signature of the
customer/client or authorized representative
• Known as “clean loan”
• Usually payable with 30 days from date credit was extended
• Can also reach 6 months, to maximum 1 year
CLASSIFICATION based on type of transaction
INSTALLMENT ACCOUNT
STRAIGHT LOANS
CONSUMER CREDIT
• When the item purchased thus acquired is for the personal
benefit of the credit grantee
• For example: A car, house, furniture and fixture, appliance, etc.
purchased for personal use, or a loan for construction of a
residential house
CLASSIFICATION based on purpose of credit
INDUSTRIAL CREDIT
• When the purchased good or service is used for business
• The borrower expects to accumulate the amortizations from the
use of purchased items
• For example: A truck purchased for trucking or cargo business
CLASSIFICATION based on purpose of credit
TRADE CREDIT
• When the item purchased is to be used in connection with the
business of the obligator, or, without necessarily expecting that
the purchase price could be accumulated from the use of a
thing, though it is the business of the borrower from where
he expects to secure payment
• For example: Money borrowed from bank to put up a business,
purchased truck for a bakery business
CREDIT RISK
• Refers to the possibility that a borrower may not repay a
loan and that the lender may lose the principal of the loan
or the interest associated with it
• Often arises because borrowers expect to use future cash
flows to pay current debts and it is almost never possible
to ensure that borrowers will definitely have the funds to
repay their debts
ADVANTAGES
• You do not need to bring a lot of money with you everywhere
• Can be used during emergencies, such as unemployment,
illness, death, or property loss
• Convenient for telephone, mail, and online purchases
• You may immediately buy things which you need even when
you don’t have money for it yet
DISADVANTAGES
• Higher costs may be incurred because you also pay for interest
rates, etc. apart from the principal amount
• You may buy more than you can really afford
• Ties up your future income even before you’ve earned it
• Can be a bad habit because you have the notion that you have
“money” or “purchasing power”
TRUTH IN
LENDING ACT
RA 3765
• This requires strict disclosure of finance charges in connection
with the extension of credit
• The declared policy behind the law is to protect the people
from lack of awareness of the true cost of credit by assuring
full disclosure of such cost, with a view of preventing the
uninformed use of credit to the detriment of the national
economy
TRUTH IN
LENDING ACT
RA 3765
• The law covers any creditor, which is defined as any person
engaged in the business of extending credit (including any
person who as a regular business practice make loans or sells or
rents property or services on a time, credit, or installment basis,
either as principal or as agent) who requires as an incident to the
extension of credit, the payment of a finance charge
What information are required to be furnished to the debtor?
• Any creditor who violates the law is liable in the amount of P100
or in an amount equal to twice the finance charged required by
such creditor in connection with such transaction, whichever is
the greater, except that such liability shall not exceed P2,000 on
any credit transaction. The action must be brought within one
year from the date of the occurrence of the violation.
• Any person who willfully violates any provision of this law or any
regulation issued thereunder shall be fined by not less than
P1,000 or more than P5,000 or imprisonment of not less than 6
months, nor more than one year or both.
CREDIT
Lesson 7
By: Dr. Babylyn Y. Vitug