NATURE OF CREDIT

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 determinable future time. This creates obligation and rights for both debtor and
creditor. There is the obligation of the debtor to pay the debt and the right of the creditor to collect
payment. From the definition the, following elements are present.

1. It is the ability to obtain a thing of value - The thing of value may be cash form of credit or
merchandise form of credit. The debtor can apply for cash credit from several sources like
banks, or other financial intermediaries. Merchandise form of credit is non-cash form, and its
sources are retail outlets and the like.

CASH FORM OF CREDIT a Cash Credit it is a short-term loan. It allows a company to withdraw
money from a bank account without keeping a credit balance.

Merchandise Credit means the crediting to the purchaser of the full amount of the payment upon
return of the goods and allowing the purchaser to purchase goods from the merchant with
the merchandise credit, or applying to the purchaser's credit account with the merchant, in the
amount of the merchandise credit. (Gift cards)

2. A promise to pay- The debtor makes a promise to pay to the creditor. For a promise to pay to be
valid, it should be acknowledge in writing by both the debtor and the creditor. The promise should
specify the principal amount, interest, and maturity date.

There is an agreement po were in the borrower makes a promise to pay the lender. They have the
written agreement that indicates the amount, interest and the fixed date po.
 3. Definite sum of money- Credit involve an exact amount of money loaned or money value for non-
cash form of credit. The contract must identify the principal value of the loan and the
corresponding interest for the credit period.

It is the impose amount of money po that is laoaned and has the equal interest in credit period or
the number of day’s po.

4. Payable on demand or future time- A promise by the debtor for the settlement of obligation may
involve a future date, known as loan maturity, or anytime the creditor demands payment.

It the assurance or promise of the borrower to the lender were in the particular day in the future
is specified as the time will happen.

CHARACTERISTICS OF CREDIT

 It is bi-partite or a two-party contract- Two parties are involved in the agreement the debtor or
the party requesting a loan and the creditor or the source of credit. The creditor demonstrates his
faith in the debtor by extending the loan or transferring ownership of the goods or service in
exchange for a promise to pay. To be legal, the contract must be in writing, specifying the amount,
time of payment, interest, and other terms agreed upon by both parties.

In this characteristic po it involves the agreement bet. Creditor and borrower were in they
show trust. And to make Legitimate they have the contract agreement po that is in a written
form.

 It is elastic- It can be increased or decreased by the creditor. Loan limit or elasticity depends upon
the capacity of the debtor and appraised value of his collateral.
In this characterisitic depends the flexibility position of the borrower and the quality or value of
his or her security.

 The presence of trust of faith- The basic element of credit is the creditor’s reliance on both the
debtor’s ability and willingness to pay his debt. This is also the risk factor in credit, particularly
when obligation remains unsettled during its maturity period. The debtor ability to pay is dependent
on his assets and will to recall maturity date for prompt payment, which measures his willingness
to settle obligations.

In this characteristic of credit po it is the belief of the creditor or the lender that the borrower has
the capability and readiness to pay his debt po because it is his/her obligation.

 It involves futurity- Maturity date for settlement of obligation is a future time. The creditor puts his
trust in the debtor’s ability and willingness to fulfill an obligation when it falls due.

In this characteristics involves the fixed date were in it has the agreement bet. Lender and
borrower and there is the willingness to pay of the debtor po.

FOUNDATIONS OF CREDIT

 Confidence- The creditor must trust the debtor’s personal character as a measure of the latter’s
capacity to pay. The creditor must have confidence in the debtor’s willingness and capacity to
settle and obligation.

As creditor po he or she must have the confidence and also a lender must have the assurance to
the characteristic of his/her borrower in ability to payback po.
  Proper facilities- In a credit contract, legal facilities must exist to make the agreement valid.
These are the credit information and credit document. Credit information includes data about the
debtor that are gauge of his paying capacity which can be gathered through a credit investigation.
About a person's or company's ability to pay debt. Credit document is the written agreement
signed by both parties identifying principal loan, interest, and maturity date or other supporting
papers to determine the debtor’s credit rating such as a copy of income tax return/withheld or
employment certificate for personal loans and financial statements for business loans. means any
of this Agreement, the Notes, if any, the Collateral Documents, any documents or
certificates executed by Company in favor of Issuing

 Stability of monetary standard- the purchasing power of money is considered when extending
credit. The more stable the value money, the greater is the possibility of approving credit. Creditors
may be reluctant to part with excess income when there are wide fluctuations of money value.

When the value of money is secure, there is the possibility that the larger the chance of
approving the credit. Lenders may be shy to deduct excess income when there is a large change
in the value of money.

 Government assistance- regulations protecting both parties are highly considered for credit
transactions. When evaluating, debtors are given more protection since they cannot be imprisoned
or non-performance of obligation, that is, if they are insolvent or do not have any asset or property.
In this case, the creditors take the risk.
In this foundation po there is an ordinance for the creditor and debtor po for the credit
transactions. When examined, debtors are given more protection because they do not perform
an obligation, that is, if they are free of charge or do not have any property or assets. In this
case, the lenders are taking risks.

 Creditor risk- this is the possibility that the debtor may not fulfill his promise for payment. Credit
risk shall be borne by the creditors.

It is the possibility of a loss resulting from a borrower's failure to repay a loan or meet
contractual obligations. Credit risk must be paid by the lenders

FIVE C’S OF CREDIT

During credit evaluation, the following are the common areas examined;

 Character- this refers to the personality of the debtor, including his mental and moral attitudes that
determine his credit rating.

It is important to know the character of your debtor po or the borrower were in if he or she has
the moral attitudes including the truthfulness when it comes to the agreement po.

 Capacity- this signifies the person’s willingness and capacity to pay. This is a measure of his
income level as basis of his paying capacity.

 It is important to know the capacity of your debtor po or the borrower were in if he or she
has the ability to pay his/her debt. His or Her expenditure po.
  Capital- this consist of the person real and personal property which can be a strong foundation for
credit approval. His capital can serve as his liquid assets case of non-payment or non-fulfillment
obligation.

It is an asset of individual po that include his/her personal property such as house which can be
broad foundation for the credit acceptance po.

 Collateral- this is something of value or the debtor’s assets that can be used as pledge. The
common practice is for collateral to be 40 percent higher than the amount of loan. The collateral
protects the creditor in the event of the debtor’s inability to discharge his loan obligation.

it is something of value or assets of the borrower that can be used as guarantee. Collateral
protects the lender in the event of the debtor's inability to eliminate his debt obligation.

Ex.his/her personal car with title

 Conditions- this may include local business conditions or economic condition during the time of
loan application. During wide fluctuations of money value, it is unwise for creditors to grant loans.

It is important that the creditor know or has a background the conditions of his or her borrower
po in a business during the day or time that she/heis borrowed money.