In this blog, I will be writing on the types and sources of credits, credit instruments and finance house.
Types And Sources Of Credits
- Mortgage
- Loan and overdraft.
- Hire purchase
- Deferred payment
- Credit card
- Debt factoring
- Hiring and leasing
- Club trading
- Budget account
- Monthly account
- Conditional credit sale
- Book me down
- Trading Cheque or voucher
Mortgage: Mortgage is one of the types and sources of credits and is a system of credit in which building societies or mortgage banks assist people to buy landed properties or houses by lending them a proportion of the purchase money. The building or property will be used as collateral security while interest will be paid by the mortgagor, i.e, the borrower. The lender is known as the mortgagee.
Loan and Overdraft: Loan is a sum of money borrowed by individuals, firms and governments from financial institutions or individuals for a particular period at an agreed rate of interest. Through this means, a sum of money is Lent out to customers for a specific period at an agreed interest rate. On the other hand, and overdraft is a form of credit provided by banks in which a customer is allowed to draw over and above the money in his account. It is a method of credit facility in which customer is allowed or permitted to draw a cheque greater than the amount of money in his credit. Interest will be paid on the overdraft.
Hire Purchase: Hire purchase is a system whereby the buyer or hirer has possession and the use of the goods while the owner retain the ownership of goods until final payment has been made. It is a system of instalmental payment which is used for purchasing durable goods. After the final payment, ownership will pass to the buyer; if the buyer defaults, the seller can repossess the goods. Hire purchase agreement must be evidence in writing and signed by the parties involved.
Deferred Payment: Deferred payment is a system whereby ownership and possession are transferred immediately to the buyer from the seller after paying an initial deposit. Payment for the balance will be paid later. The seller cannot repossess the goods if the buyer defaults in Payment. He can only reclaim through court action.
Credit Card: Credit card is another types and sources of credits card issued by some large stores to approved applicants which enables a holder to obtain goods and services on credit at specified suppliers up to an agreed amount. The holder has a borrowing limit. It is advantageous in the sense that, it economises the use of cash, e.g, eurocard, valuecard and smartcard. This is common in advance countries, e.g. America and Britain.
Factoring: Factoring is a system whereby trade debts can be sold immediately for cash to factoring firm (bank) for a lower amount than the actual value of the debt. The factoring firm after purchasing the debt will then collect them as its own. The firm will by arrangement purchase the trade debt of its client and collect them on its behalf.
Leasing: Leasing is a system whereby the owner of a property grants to another the right to exclusive possession for a fixed time in return for periodic payment, e.g. leasing of equipment and houses.
Club Trading: Club trading is a system of credit whereby some organizations set up clubs to collect regular contribution from members. This contribution can be withdrawn periodically in order to make purchases at the shops.
Budget Account: Budget account is a system operated by departmental stores whereby a customer agrees to pay a certain amount of money per month which enables credit up to eight times than amount to be obtained. This is common in advance countries and among high income earners. The customer will pay service charge on all good bought. The main problem with this type of credit is that choice of goods will be restricted to a single shop.
Monthly Account: In this types and sources of credits, large departmental stores open an account for the customer which enables them to buy goods on credit. At the end of the month, the customer is sent a statement showing details about goods bought. This will ensure monthly payment instead of paying for individual transactions.
Advantages of monthly Account
- There is no additional charge.
- The goods are bought at cheaper prices
- It saves the customer the trouble of writing cheque every time.
Conditional Credit Sales: Conditional credit sales is an agreement for the sales of goods and not hire in which title to goods does not pass absolutely until all instalments have been paid. The buyer is unable to transfer a good title to an Innocent purchaser. The seller has a right to take the title under specified condition. It has to be witnessed by somebody.
Book me down: Book me down is another types and sources of credits very common within the low income earners in underdeveloped countries like Nigeria. The customer will purchase goods on credit and their names are written down. Payment may be made at the end of the month after receiving their remuneration from their places of work.
Trading Cheque or Voucher: In this system of credit, a voucher is issued by a club which is formed to enable it’s members buy from specified local shops in the locality. This provides alternative to hire purchase. Percentage charge will be made with the actual amount paid over a certain week at an agreed rate.
CREDIT INSTRUMENTS
credit instrument are written documents or agreements as evidence of repayment in credit transactions. They are numerous and cover a variety of ways in which credits are extended. They include:
- Bill of exchange
- Promissory note
- Letter of credit
- Credit cards
- Debentures
- Vouchers
- Hire purchase contract
- Bonds
- I owe you (IOU)
- Mortgage agreements
- Lease agreement
- Bank draft
FINANCE HOUSE
Finance house is a major source of financing credit transactions, e.g, hire purchase. They mobilise funds from deposit from public which attract high rate of interest or by borrowing from banks, e.g, merchant banks, commercial banks and insurance.
You can read on my other article the advantages and Disadvantages of credit sales