Domestic credit to private sector in 2005
is the provision of resources (such as granting a
loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a
debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment. The first party is called a
creditor, also known as a
lender, while the second party is called a
debtor, also known as a
borrower.
Movements of
financial capital are normally dependent on either credit or
equity transfers. Credit is in turn dependent on the reputation or
creditworthiness of the entity which takes responsibility for the funds.
Credit need not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services, and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society (Ingham 2004 p.12-19).
Credit is denominated by a
unit of account. Unlike
money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a
medium of exchange. As such, various forms of credit are frequently referred to as
money and are included in estimates of the
money supply.
Credit is also traded in the
market. The purest form is the
credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this
risk the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a
percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan,
bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).
Trade credit
The word
credit is used in commercial
trade in the term "
trade credit" to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a
credit manager.
Consumer credit
Consumer debt can be defined as ‘money, goods or services provided to an individual in lieu of payment.’ Common forms of consumer credit include
credit cards, store cards, motor (auto) finance, personal loans (
installment loans), retail loans (retail installment loans) and
mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England's definition of "Lending to individuals". Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit - such as the one adopted by the Federal Reserve in the US.
The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes
interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for
credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement.
Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an
annual percentage rate (APR). The goal of the APR calculation is to promote ‘truth in lending’, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation (Finlay 2009).
See also
