CREDIT - YOUR SAVING GRACE OR YOUR DOWNFALL

Introduction

There are numerous ways in which businesses or individuals can obtain credit. For some, it remains a lifelong battle to find institutions, leave alone individuals who are willing to accept the risk of providing them with credit finance. In this regard, we should spare a thought for the billions of people who will never qualify for a credit loan. The fact that there are so many citizens of the world who do not have work and, that others' income for work performed is so low that they will not qualify for a loan, stands as an indictment of world leaders to find fair solutions to the problem of gaining access to the benefits of money.  The ability that credit provides to build wealth is denied to those who cannot obtain credit. This condemns those people to a life of abject poverty without any prospect of a better future.

The Role of Credit Provision in the Economy

Credit provision plays an enormous role in the economy of a country.  Businesses and individuals are enabled to spend future income and businesses to grow their enterprises. The main role player, the banks, are able to create credit. In this way, the total credit in circulation can be increased but also decreased.  Should the level of credit creation rise too high, borrowers may collectively spend more than a country can produce. The result is that the citizens of a country may spend above their reasonable level and developmental abilities. Credit that rises too sharply increases the demand for services and products. This demand places pressure on the resources of a country. All factors of the economy begin to rise, e.g. salaries, production costs, and prices. This creates a vicious cycle which is called inflation that inevitably will lead to a drop of living standards.

When this position arises the benefits of credit finance to allow the economy to grow and develop, is replaced by the detrimental situation where growth disappears. The banks are thus in a position to control the flexible instrument of credit creation which must be used with great care and responsibility.  Cooperation with government, industries, businesses, and individuals is required to properly fulfill this task.  Recklessness in the extension of credit is a big no-no as a result of this responsibility.  Minimum requirements for the granting of credit must be set down and adhered to.

The Role of Governments

Governments all over the world maintain a close relationship with banks as the prime lending institutions.  If required, legislation is adopted to control credit creation in conjunction with other measures. Again, there are various approaches in divergent countries.  Developed countries may be able to allow greater freedoms regarding the creation of credit while developing countries may tend to control the process more hands-on.  There is, however, no set position for any type of economy and political philosophy also plays an important role, something that will change from time to time.

Governments provide assistance to those who do not qualify for loans in a number of ways.  This is the duty of government.  This assistance may vary from the payment of subsidies to the provision of free services and goods including the provision of basic housing. The only permanent solution to the problem of improving living standards for all falls outside the scope of this paper.  From any number of perspectives, this may be the biggest challenge facing the world.

The Role of the Individual Borrower

It is clear that individuals play a crucial role in the system of credit creation.  This is a responsibility which must be accepted. The need to take up credit will also have effects for every individual on his own, irrespective of the other role players.  Too much credit may lead to a position where income is exceeded by liabilities and from there to insolvency.

The Role of Industry and Business

If you are successful in business you will know how to use money. A combination of own funding and credit is crucial for your future success. Financial planning includes the setting of goals, drawing up a business plan, and responsible expenditure.

Examples of Credit Finance

When the provision of credit is considered it is clear the chief role player in the process is the different banking institutions found all over the world. A short description of the various ways in which people can obtain loans are the following:

• Personal loans by the banks are usually extended to their clients who are creditworthy and often who can provide some form of collateral value which can secure the credit in an acceptable way. These loans are usually of a short-term duration;
• Credit cards are widely used as a way of extending money loans to clients but there is no requirement here to secure the loan directly;
• For clients with certain bank accounts like check accounts, overdraft banking facilities can provide the means of increasing their short-term spending powers;
• When a business cannot provide a client with credit facilities it can offer services or products at discounts which can be seen as a form of credit provision;
• Agreements for the payment of a product in installments, another bank instrument, is used to buy expensive items like cars or furniture over a period of time while the client is able to use the article in the interim.  Only, once all the installments are paid in full does the ownership pass to the credit receiver;
• Mortgage bonds are used exclusively for the purchase of immovable property like farms or houses.  It provides the user with a long-term loan to pay off the mortgage amount with interest and then only does the client become the full owner of the property. Agreements of payments by installment and mortgage bonds imply the credit provider remains in effect the true owner of the article until the full extent of the loan is repaid;  
• You can also use the instrument of pawning an item of value like a diamond ring or a TV to obtain a very short-term loan.  While the item is kept in pawn you continue to pay interest to the credit provider until you can repay the entire loan at once. The item in question then becomes your property again;
• People seeking credit may be able to convince a friend or family member to provide them with a money loan and these arrangements are usually more informal.  The obvious danger of bad blood between people who should be sharing a loving bond must be taken into account;
• Lastly, reference is made to getting credit from loan sharks.  Prohibitive interest rates alone should discourage those desperate enough to seek this type of loan.  An additional disadvantage is that it may be downright dangerous and is best avoided;

Across the world, there may the considerable variations around the acquisition of credit, and diverse cultures may have equally diverse practices.

Agreements as Basis for Loan Transactions

Most forms of credit are underpinned by agreements which set out the terms and conditions applicable to the loans. Once again, variations between countries and culture may cause different requirements for agreements.  Legislation about the basic requirements of credit agreements will undoubtedly vary between countries.  Mostly such agreements will deal at least with the following issues:

• The applicable interest rate which may be variable according to changing circumstances;
• The requirement of a deposit if relevant;
• The period of the agreement and the number of installments payable;
• The precise amounts of installments including interest, capital, fees, and insurance;
• The original amount of the loan;
• The procedure should the credit receiver want to complete repayment at an earlier date than agreed;
• When installments are payable e.g. monthly or weekly with the relevant dates;

The credit provider may consult the applicant's employer, bank, credit agencies, and other businesses where existing credit is extended.

Conclusion

Should you desire to obtain credit your starting point is the bank.  You may also consider obtaining the advice of a specialist.  You will have to build up a reputation as a good payer, thereby improving your credit profile.  Think things through and take action when you know you can truthfully answer the uncomfortable questions that your bank may be throwing at you. The writer sincerely hopes that the reader is one of the lucky ones who can improve his position by the responsible use of credit financing.