It is interesting to note that most of our modern terms involving money have origins in the Greek or Latin languages.
The word ‘Credit’ is taken from the Latin ‘Credo’ which roughly translates to “I Believe”, a fitting meaning to reinforce a tradition of trust that involves monetary transactions. In the days of yore, lending and borrowing were purely done by guarantee through the spoken word rather than the written word. Credit in olden days did not necessarily involve money and the term was used to describe barter exchanges of goods and services.
However, in modern economy, the term credit denotes a transaction involving money. Nowadays long drawn contracts and agreements, most of them worded with legal terms that are beyond the comprehension of ordinary people, fulfill the obligations of lending and receiving.
Credit means deferred payment or payment at a later date for receipt of money, goods or services. The deferred payment (late payment) is what is known as “debt”. Credit is given by a creditor or lender to a debtor or the borrower.
A specified sum of money given to an individual for education, family, household, personal and vehicle purposes is termed a ‘loan’, also called consumer credit, consumer lending or retail lending.
Some broad categorizations of consumer loans
Consumer loans are characterized by different types – convertible loans, installment loans, single loans, secured and unsecured loans, fixed-rate and variable-rate loans etc.
• Single loans – also called interim or bridge loans; as the term suggests, they are for short-term finance requirement. Single loans have to be repaid at the end of the loan term in a lump sum including interest rates.
• Installment loan or EMIs – are paid at regular intervals, usually monthly. Home and vehicle loans come under this category. The longer the repayment term, more the cash flow as interest rate calculations vary.
• Secured loans – in this category, you “secure” an asset, a home, car or any collateral that can be used to recover payment if you fail to make the guaranteed payments. Secured loans also apply to home and car loans and since they are backed by sizeable collateral, interest charges on such loans are lower.
• Unsecured loans – are those that do not require collateral and usually given only to borrowers with excellent credit ratings and histories, more often companies or high net worth individuals and interest rates are compounded.
• Fixed rate loans – a great percentage of consumer loans fit this bracket. The same interest rate applies for the duration of the loan term but when compared to variable rate loans, fixed rate loans attract more interest as there is the likelihood of the lender making losses if the market fluctuates.
• Variable-rate loans – upfront these loans have a lower interest rate and there is the clause of adjustable interest rates applicable at periodic intervals of the loan-term. The rate of interest is based on an index governed by market trends and an interest-rate spread calculated monthly, six-monthly or annually.
• Convertible loans – are ones where the interest structure can vary from a fixed to variable rate of interest or vice-versa at a pre-determined time during the loan-term.
Securing consumer credit or consumer loans can be a very taxing process and requires not only your informed and evaluated inputs but also sound financial advice from an expert financial consultant. It is useful to remember the “Six C’s of Credit”, namely Capacity, Capital, Character, Collateral, Condition and Credit.