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Credit is defined as the power or ability to obtain money, goods and services at the present time in exchange for a
promise to pay with money upon demand or at a future determinable time. The reason for credit is the need or desire to
obtain economic goods. It is also depends on how the debtor convince the creditor to trust him.
FUNCTIONS OF CREDIT
1. Functions as a medium of exchange
2. Elevate the moral standards of the people
3. Enables businessman and corporation gather large amounts of capital
4. Allows wealth to be fully utilized
5. Helps in expansion and contraction of the money supply
CHARACTERISTICS OF CREDIT
*Credit as Bipartite contract – involves 2 parties the debtor and creditor.
*Credit as Pecuniary Contract – expressed in terms of money, when you buy or borrow money it is understood that
such obligation shall be paid in money.
*Credit as a Fiduciary Contract – debtor must always be able to merit the trust and confidence of the creditor.
*In Credit, risk is always involved –
*Credit always involves futurity – payment is always done at a future date.
SIGNIFICANCE OF CREDIT
Credit plays an important role in the distribution goods. It allows the production of goods which will increased the
employment of labor. The role of credit is to provide financial means for business who take advantages of market
opportunities in both domestic and foreign markets. Credit in the hands of consumer has a great impact on the quantity of
goods and services consumed. Today, many families depend on credit to be able to buy high-priced goods and many new
homes and automobiles are being financed by installment credit.
Personal Loans- usually granted for the purchase of expensive consumer items. A good source of these kind
credit is the Social Security System (SSS), Government Service Insurance System (GSIS), building and loan associations,
home financing companies such as Pag-ibig plan.
REQUIRED INFORMATION
1. The cash price of the property to be serviced or acquired.
2. The down payment, if any, or the trade in price.
3. The difference between the amounts under 1 and 2.
4. The charges, individually itemized, which are paid or to be paid in connection with the transaction and which are
not incidental to the extension of credit.
5. The total amount to be financed.
6. The finance charged expressed in terms of pesos.
7. The percentage that the finance charge bears to the total amount to be financed which is expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
*Any person who willfully violates the provision of the act – shall be fined by not less than PHP 5,000 or imprisoned
for not less than 6 months or not more than I year, or both.
C. Bank Credit or Bank Loans – are credits granted by bank to businessman to finance their short term credit needs.
Example: Commercial banks
E. Investment credit – when a business prefers to acquire funds by entering a long term borrowing arrangement, it is
said to be using investment credit.
- Acquisition of fixed assets
* long term borrowing arrangement- one of the most common forms of financing used by business enterprise.
F. Agricultural Credit
1. Crop Loan- This loan is given to farmers for the purpose of financing the production of a particular crop like rice,
corn, peanuts, soybeans etc. Farmers cannot sell his crops unless he notifies his creditor.
2. Livestock Loan- This loan is obtained to finance the raising of pigs, chickens, ducks, goats, and other animals for
breeding purposes
3. Agricultural Time Loan- This loan is used to finance the development and improvement of a farmland. These are
short-term loans, used to finance the acquisition of farm equipment.
4. Commodity Loan- This loan is obtained to finance the selling and distribution of farm crops.
G. Industrial Credit – loans granted to industries to finance the acquisition of equipment’s and machineries, construction
of a plant or factory, and purchase of raw materials.
H. Real estate credit are loans to finance the purchase and improvement of real properties.
I. Government or Public credit- credits obtained from any of their gov’t institution or their instrumentalities.
-debtor maybe the national, provincial or local gov’t
J. Secured and Unsecured Credits
Secured credits are credits which are covered by properties of value called collaterals to guarantee loans, when
borrower fails to pay the creditor has the right to foreclose the mortgage and have such properties disposed of to satisfy
the former's obligation.
Unsecured credit is one where the borrower has merited the full trust and confidence of the creditor, also called
as character loan or clean loan.
SOURCES OF CREDIT
Banks – are the most common sources of credit. Most of the commercial credits including industrial and agricultural
credits are obtained from the banks.
Classification
Commercial banks – specializes in giving commercial loans to businessmen.
Thrift banks – gives loan to individuals for their personal needs and to the industry for the enhancement of our
agriculture and our economy.
3 categories
Savings and mortgage bank – its purpose is to encourage thriftiness among people. It accumulates the savings of the
depositors.
Stock savings and loan association – engaged in the business of accumulating the savings of the people and using such
accumulated funds, together with its capital, for loans and investment in securities of productive enterprises or
securities of the government.
Private development bank – it aims to develop and expand the economy of the country pursuant to the socio-economic
program of the government.
Rural banks – organized to cater to the needs of farmers and small businessmen in the rural areas including the cottage
industries.