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Bases of Credit

Updated on August 7, 2009

Bases of Credit

The word "credit" has been derived from a Latin word creditum. It means trust. Credit refers to the ability to acquire something of value like goods, services, money, or securities at the present time in return for a promise to pay at a certain future time. It involves risks. The possibility that the borrower can not fulfill his promise due to circumstances beyond his control always exists.

In granting credit to borrowers, there are bases in evaluating their ability to pay and willingness to pay:

Character. This refers to the personal integrity of the borrower. His determination to pay can be evaluated by his past business record. Character also includes personal habits, attitudes, or vices of the borrower.

Capacity. This has something to do with the managerial ability of the borrower. Could he use wisely and efficiently his loan? Factors like responsibility, maturity and business competence of the borrower determine his capacity to pay.

Capital. This refers to the resources owned by the borrower such as priorities. With such properties, the ability of the borrower to obtain credit has become greater.

Collateral. Usually, the title of the land is required as a security of the loan. This is a safety measure for the payment of the loan. Buildings, machines and other valuable properties are used as collaterals.

Condition. Conditions in the community, industry, or the whole economy affect the ability of borrowers to pay their loans. For example; peace and order, inflation, profitability of a project, etc.

Advantages of a Credit Economy

1. Allows business firms to acquire cash loans by using their machines or buildings as security, instead of selling a part of their physical properties to obtain money. They can also sell bonds to generate more funds for their investment ventures.

2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit.

3. Government projects or programs can be funded through bonds or loans.

4. Credit accelerates production, employment, income, and consumption.

5. Permits low-income consumers to enjoy the consumption of goods and services sooner, like house and lot, appliances, and other consumer products.

Disadvantages of a Credit Economy

1. Heavy borrowings by the governments may likely lead into inflation. It requires competent and dedicated monetary authorities, and the cooperation of top government officials to use properly local and foreign loans.

2. Borrowing by the government may result to extravangance and inefficiency. This has been noted by development economists on the credit performance of the developing countries.

3. Business errors in the use of credit funds have unfavorable chain effects on the whole economy. Failure of some firms to settle their debts with other companies affect the latter to pay their bank loans. In turn, the banks cannot pay their depositors.

4. Excessive loans from other countries by the government may likely be a burden to future generation, unless such loans are wisely invested in the economy for the benefits of the masses.

5. In some cases, credit reduces future consumption of debtors.

The Social Philosophy of Credit

Credit does not exempt even the rich. In fact, it is the rich who use more credit facilities because of their ability to pay, and their special personal connections with the officials of the various financial institutions. There was a rich man who was able to purchase a hacienda through bank credit. Obviously, the rich become richer because they are given more opportunities to obtain loans for business or production purposes.

The investments of the rich would have been more significant if their benefits reach the poorest of the poor. Profits are still attainable without abandoning their social responsibility. Credit resources should be used not only to benefit the users but also society and the economy. This should be the guiding principle of the credit system in granting loans to applicants. Considering the scarcity of our financial resources, our government should be more careful and wise in the allocation of such resources.

The objective of the credit system of the government is to improve the social and economic conditions of the poor, especially in the rural areas and urban slums where conditions are more miserable. The chains of economic slavery should be broken. The poor need money for putting up income-producing projects or business like poultry, sari-sari store, piggery, or tricycle. However, most of them can not borrow from financial institutions for lack of acceptable properties as collaterals. With such institutional barriers in obtaining bank credit, the poor are clearly excluded from the credit system. Thus, the credit program of the government for the poor has become a farce.


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      Nancy Montgomery 5 months ago

      I have a question I am looking for a loan yes I admit my credit is terrible I also have social security disability I need a loan for emergncy situation

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      lyrene 6 years ago

      which is the most important of basis? and why?