|
|
|
|
What is credit?
Credit is money a creditor or lender makes available for you to borrow
with a deferred repayment. In exchange for the credit, the lender gets
back the money, usually paid on a monthly basis, plus interest. The
debtor gets the use of the money to pay for and take possession of
goods and services immediately. Modern society is dependent upon credit
to generate sales; it enables people to have the things they want and
need, but can't afford to pay for right away.
Interest is the
compensation that the creditor demands for the use of his/her money.
Money has a "time value" to it. Over time the value of money decreases
(due to inflation): what a dollar will buy today is much less than what
a dollar could purchase 20 years ago. Since a creditor pays out money
today in exchange for a repayment of it in the future, the creditor
loses the time value of that money. In order to make credit available,
creditors are allowed to charge interest, often referred to as a
finance charge. For example, if a lender gives you $10 worth of credit,
s/he might expect to be repaid $11 within the next two months; the
extra dollar is the interest charged for the loan.
Interest on credit can be either simple or compound.
Simple
interest is interest charged only on the principal amount borrowed.
Simple interest does not add the interest charge back to the
outstanding loan during the length of the loan. Compound interest is
interest charged not only on the principal, but on the interest accrued
during the length of the loan. Thus, simple interest charges are less
than compound interest charges.
Credit is extended pursuant to
a written contract. The written contract sets forth the respective
rights and responsibilities of the creditor and the debtor. Credit can
be used by both businesses and individuals. When an individual uses
credit, it is referred to as "consumer credit."
(Reviewed 11.3.08) |
Free Case Evaluation From An Experienced Bankruptcy Attorney.
|
|
|
|
|
|
|
|
|
Free
Bankruptcy Case Evaluation |
|
Reviewed by an Experienced Attorney |
|
|
|
|
|
|
|
|
State Law Center
|
Legal Resource Directory
|
Legal Articles
|
Insurance Advice and Quotes
|
FreeAdvice Answers
|
Community Forums
