CREDIT AND ITS TERMS Реферат

Ключавыя словы: крэдыт, крэдытаздольнасць, працэнтная стаўка, крэдытны каэфіцыент, крэдытор, пазычальнік, грашовы паток, графік пагашэння крэдыту, заклад, давер, спрыяльныя ўмовы, абавязацельства.

Прадметам даследавання ў дадзенай працы з'яўляюцца асноўныя тыпы крэдытаў.

Аб'ём рэферата – 13 старонак. Праца складаецца з ўвядзення, чатырох частак, заключэння і слоўніка.

Ва ўвядзенні абгрунтоўваецца актуальнасць абранай тэмы, фармулюецца мэта і вызначаюцца задачы.

Першая частка прысвечана вывучэнню паняцця «крэдыт», яго асноўных умоў, пераваг і недахопаў крэдытавання.

У другой чале дадзена апісанне асноўных тыпаў крэдытавання, іх сутнасць, а таксама выяўленыя прынцыпы крэдытаздольнасці.

У трэцяй чале дадзена інфармацыя аб працэнтных стаўках і магчымых рызыках падчас крэдытавання.

У чацвёртай чале апісваецца тое, што трэба ведаць пры выкананні крэдытнага аналізу і яго каэфіцыентах.

Заключэнне змяшчае высновы аб выкладзеных у падзелах звестках.

Keywords: credit, creditworthiness, interest rate, credit ratio, lender, borrower, cash flow, security right, loan repayment schedule, pledge, trust, favorable conditions, obligation.

The subject of research in this paper are the main types of loans.

The volume of the abstract is 13 pages. The work consists of introduction, four chapters, conclusion and glossary.

In the introduction is justified the relevance of the chosen topic the goal is formulated and the tasks are defined.

The first chapter is devoted to the study of the concept of «credit», its basic conditions, advantages and disadvantages of lending.

In the second chapter, a description of the main types of lending, their essence, and also revealed the principles of creditworthiness.

The third chapter provides information on interest rates and possible risks during lending.

The fourth chapter describes what you need to know about performing a credit analysis and its ratios.

The conclusion contains conclusions about the information presented in chapters.

In today’s economy, it is more difficult than ever to qualify for a mortgage.  With delinquencies rising, credit score needs to be good, if not stellar, for lenders to say “yes”. 

Still, most people are confused when it comes to understanding credit basics.  Even seasoned investors find themselves overwhelmed in today’s changing market.

Credit is a transaction between two parties in which one, acting as creditor, supplies the debtor with money, goods, services in return for the promise of future payment. 

The effectiveness of the bank's credit policy is directly dependent on the forms of credit that bank provides.  The relevance of research in this direction is related to the fact that credit risk is the main risk faced by banks and other lending institutions, since the provision of loans is the main direction of their activities.  The loan is also a natural mechanism for the redistribution of monetary resources and rate of profit, thus, the importance of researching forms of credit not only for banking institutions, but also for all economic units involved in the redistribution of profits, is indicated.

Based on all the foregoing, the purpose of this work is a structural and theoretical analysis of the loan. To achieve the goal in the work the following tasks are planned:

- to characterize the term “credit” and its terms;

- to look through the credit types and credit worthiness;

- to show the dependence of the credit from interest rates and its risk;

- to analyze credit ant its ratios. 

As a financial transaction, credit is the purchase of the present use of money with the promise to pay in the future according to a pre-arranged schedule and at a specified cost defined by the interest rate.

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency and the length of time over which it is lent, deposited or borrowed.

Understanding the basics of credit analysis is important when raising debt financing for commercial real estate projects. Credit analysis is the first step in the credit approval process a bank goes through to evaluate a corporate borrower, but it also comes in handy when evaluating the financial strength of tenants, corporate guarantors, and other individual operating businesses. 

The term "credit" was first used in English in the 1520s. The term came "from Middle French crédit "belief, trust," from Italian credito, from Latin creditum "a loan, thing entrusted to another" from past participle of credere "to trust, entrust, and believe". The commercial meaning of "credit" "was the original one in English.

Credit is a transaction between two parties in which one, acting as creditor, supplies the debtor with money, goods, services in return for the promise of future payment. 

Creditor is someone who money is owed to. Debtor is someone who owes money. 

As a financial transaction, credit is the purchase of the present use of money with the promise to pay in the future according to a pre-arranged schedule and at a specified cost defined by the interest rate. In modern economies, the use of credit is widespread and the volume enormous. Electronic transfer technology moves vast amounts of capital instantaneously around the globe irrespective of geopolitical demarcations.

Credit has its advantages: immediate possession, flexibility, safety, and disadvantages: overspending, higher cost.

The terms of the credit contract deal with the repayment schedule, interest rate, necessity of collateral and debt retirement [2].

Credit contracts vary in maturity. Short-term debt is from overnight to less than one year. Long-term debt is up to 30 or 40 years. Payments may be required at the end of the contract or at set intervals, usually on a monthly basis. The payment is generally comprised of two parts: a portion of the outstanding principal and the interest costs. With the passage of time, the principal amount of the loan is amortized or repaid little by little, until completely retired. As the principal balance diminishes, the interest on the remaining balance also declines. Interest on loans does not pay down the principal. The borrower pays interest on the principal loan amount and is expected to retire the main at the end of the contract through a balloon payment or through refinancing.

Interest rate is the cost of purchasing the use of money. The interest rate charged by lending institutions must be sufficient to cover operating costs, administrative costs, and an acceptable rate of return. Interest rates may be fixed for the term of the loan or adjusted to reflect changing market conditions. A credit contract may adjust rates daily, annually, or at intervals of three, five and ten years.

Assets pledged as security against loan loss are known as collateral. Credit backed by collateral is secured. The asset purchased by the loan often serves as the only collateral. In other cases, the borrower puts other assets, including cash, aside as guarantee. Real estate or land collateralizes mortgages.

Credit evaluation and approval is the process a business or an individual must go through to become eligible for a loan or to pay for goods and services over an extended period. It also refers to the process businesses or lenders undertake when evaluating a request for credit. Granting credit approval depends on the willingness of the creditor to lend money in the current economy and that same lender's assessment of the ability and willingness of the borrower to return the money or pay for the goods obtained in a timely fashion. Typically, small businesses must seek credit approval to obtain funds from lenders, investors, vendors and grant credit approval to their customers.

There are three primary types of credit: producer credit, consumer credit and micro credit. 

Producer credit is extended to businesses. 

Consumer credit is extended to individuals. 

Micro credit is the extension of very small loans to the unemployed, to poor entrepreneurs and to others living in poverty who are not bankable. 

Credit can be extended long term or short term. Long-term credit generally has a maturity of one year or more.

Businesses seek credit to finance operations or to purchase long-lived assets such as machinery or real estate. A strict accounting may not precede the credit contract, yet businesses are presumed to consider profit maximization concerns when deciding to borrow [1].

Individuals seek credit for parallel reasons. Businesses purchase long-lived property such as machinery or real estate; individuals purchase durable goods or homes. Whereas businesses consider the bottom line, individuals borrow for complex reasons. 

Credit extended to producers or consumers is typically a loan. What is and is not a loan is primarily a legal distinction. A real or financial asset secures most credit but not all. If the debtor breaches the contract that is secured by property, the creditor can claim or repossess the property.

The types of consumer credit are:

1) Installment closed-end credit is used by department stores. It has a fixed number of payments. A particular amount of money is lent to the consumer and no more. For example, if you purchase a sofa and chairs at a furniture store, the store might give you credit up to the full amount of the sale, which will be repaid with interest, but the store does not make further credit available to you under that agreement. The full amount of the principal and interest must be paid within a pre-determined time.

2) Non-installment credit is the simplest form of credit. It is usually very short term - thirty days. It enables consumers to take possession of property today and pay for it within a month or so. Many department stores offer non-installment credit to their regular customers. This enables the store to make sales now and get the money in the near future, thus generating better cash flow for the business which might not otherwise occur.

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency and the length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money or the rate a bank pays its savers for keeping money in an account.

Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods and large assets such as a vehicle or building.

Interest is essentially a rental, or leasing charge to the borrower, for the use of an asset. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the lease rate. When the borrower is a low-risk party, he will usually be charged a low interest rate. If the borrower is considered high risk, the interest rate that they are charged will be higher.

In terms of borrowed money, the interest rate is typically applied to the principal, which is the amount of money lent. The interest rate is the cost of debt for the borrower and the rate of return for the lender.

Interest rates are applied in numerous situations where lending and borrowing is concerned. Individuals borrow money to purchase homes, fund projects, start businesses, pay college tuition, etc [4]. 

Businesses take loans to fund capital projects and expand their operations by purchasing fixed and long-term assets such as land, buildings, machinery, trucks, etc. The money that is lent has to be repaid either in lump sum at some pre-determined date or in monthly installments, which is usually the case. The money to be repaid is usually more than the borrowed amount since lenders want to be compensated for their loss of use of the money during the period that the funds are loaned out; the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves. 

The difference between the total repayment sum and the original loan is the interest charged. The interest charged is an interest rate that is applied on the principal amount. 

Lenders use both subjective and objective guidelines to evaluate risk and to establish a general rate structure reflective of market conditions and borrower-specific terms based on individual credit analysis. To be profitable, lenders charge interest rates that cover perceived risks as well as the costs of doing business. The risks calculated into the interest rate include the following:

1) Opportunity cost risk. The lender fixes interest costs at a level sufficient to justify making a loan in the present rather than waiting for more advantageous terms in the future. The lender focuses on a desired rate of return rather than the credit worthiness of the borrower [7].

Credit analysis is the first step in the credit approval process a bank goes through to evaluate a corporate borrower, but it also comes in handy when evaluating the financial strength of tenants, corporate guarantors, and other individual operating businesses. 

There are some credit analysis basics:

1) Capacity measures the ability of a company to pay its debt service obligations. Analyzing capacity comes down to looking at historical and projected cash flows. Typically, a lender will review the past 3-5 years of financial statements and tax returns in order to determine a cash flow figure, which will depend on the context. It recognizes that depreciation and amortization are non-cash expenses and therefore adds them back to the cash flow figure, along with interest and taxes, to arrive at a dollar amount that’s available to service the debt [3].

6) Depending on the type of business, additional capital expenditure estimates can also be included to account for the real effect of depreciation of machinery and other capital goods. 

2) Collateral answers the question “what happens if the borrower can’t generate enough cash flow to meet its debt service obligations”. To protect its depositors, lenders like to be covered in case things don’t work out as planned and a company’s cash flow is unable to service its debt obligations. Collateral gives lenders extra assurance that their loan will not go bad if the borrowing company does not operate as expected.

7) In the case of liquidation, sufficient collateral value will ensure that a lender is covered if things go south. Collateral includes tangible assets, such as accounts receivable, inventory, equipment and real estate. 

3) Capital ensures that the owners of the company have sufficient “skin in the game.” Capital measures how much the owners stand to lose should the business fail. The more capital there is, the higher the chance that the owners will do everything in their power not to fail. Having sufficient capital also ensures that there is a “cushion” in case the company’s cash flows turn negative for a season. 

4) Conditions address the economics of the industry and the larger macro-economic environment. The bank would like to ensure that the company has competitive advantages and will not be adversely affected by industry trends. 

5) Character assessment is the most important factor when performing credit analysis. Banks want to know that the person is trustworthy and isn’t involved in any ethically questionable activities. Most of this assessment comes from lenders being involved in the community and understanding the history of real estate developers and local businesses.

To conclude all the described information, it is possible to say that credit is the ability to borrow money. There are many situations when people borrow money: car loans, credit cards, student loans, etc. In each case, people are borrowing money from a lender with a promise to pay it back. The money they owe is called debt.

Earning the trust and confidence of banks and other businesses to lend money is called establishing credit. By showing them the trustworthy, people strengthen the ability to borrow again the next time. This is called having a good credit record or a good credit rating. When people borrow money, they need to make monthly loan payments and usually have other costs called interest.

A credit score is numerical rating used by lenders in the approval decision process. Lenders usually want to know the credit history of people who ask them for credit cards and loans.

People can improve their credit worthiness by keeping their debts to a manageable percentage of their income and paying bills on time. It's important to be aware that the older a delinquency is, the less weight it is given.

During periods of low interest rates, the economy is stimulated as borrowers have access to loans at inexpensive rates. Since interest rates on savings are low, businesses and individuals are more likely to spend more and purchase riskier investment vehicles, such as stocks. While a government will prefer interest rates to be low, low interest rates eventually lead to a market disequilibrium in which demand rises higher than supply, causing inflation. When inflation arises, interest rates increase.

Credit analysis is the first step in the credit approval process a bank goes through to evaluate a corporate borrower, but it also comes in handy when evaluating the financial strength of tenants, corporate guarantors, and other individual operating businesses. 

Understanding the basics of credit analysis can be an overwhelming task, but credit analysis is also an important and useful skill set to develop. This guide was intended to help demystify credit analysis and give some practical tools and intuition.

Most modern credit is expanded through specialized financial institutions, of which commercial banks are the oldest and most important. The lender must judge each loan he makes based on the character of the borrower, his capacity to repay and his guarantee.