Concept of Credit:
- The seller and the buyer enter into a legally binding agreement, where by the seller allows the buyer to have immediate possession (not necessarily ownership) of the goods
- The buyer agrees to pay the principal, along with interest in a given period of time in a number of agreed, fixed installments
- This installment payment may be made to the seller directly if he is financing the credit
- However, it is usually financed by specialized financial institutions
- The financer pays in full to the seller on behalf of the buyer and then keeps collecting the installments from financers along with interest
| Advantages | Disadvantages |
| Increases turn over since people can afford to buy | Administrative burden of maintaining records |
| Stocks of seller cleared quickly | Capital required for financing |
| Financer gets interest | Encourages people to spend rashly |
| Customers can use goods without making payments | Goods are repossessed if price not paid |
| Allows people with steady income to own property | General increase in price level due to over spending |
Types of Credit:
- Hire Purchase:
- After paying a small amount as down payment, customer can pay the remaining amount in installments
- 3rd party is involved which buys the product from the manufacturer and gives it to the customer on credit
- In case the customer fails to pay on time, the goods are repossessed
- Suitable for durable capital goods such as vehicles
- Extended Credit:
- The buyer becomes the owner as soon as the agreement is made
- Buyer agrees to repay in periodic installments
- No 3rd party is involved – manufacturer sells directly to customer
- The manufacturer cannot repossess in case of non payment
- Suitable for consumer goods
- Store Cards:
- Large scale retailers offer this card to regular customers
- It can be used to buy goods and then pay later
- Interest is charged
- Gives the retailer competitive edge
- Credit Cards:
- A loan approved by the bank in the favor of the drawer, which can be used while shopping
- Bank assigns a limit of money depending upon the financial status of the customer
- These cards are accepted in most large scale shops, so the customers don’t need to carry cash