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:

    1. 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
    1. 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
    1. 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
    1. 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