Classification
of Credit
ACCORDING TO CATEGORY USER
• Consumer Credit
It refers to a short and intermediate term loans
used to fund the acquisition of commodities or
services for personal consumption.
Upside and Downside of Consumer Credit
1. Convenient
With lightweight credit cards, it is not always
necessary to carry around a large wallet or
purse filled with cash. You can purchase items
without carrying your checkbook everywhere.
2. Emergencies
May people live payday to payday. Handled
responsibly, credit cards can keep you from stress
and worry about how your family’s financial needs
will be met.
3. Large Purchases
Without consumer credit, large purchases would
not be possible for many people. Consumer credit
allows a family to afford the necessities and used
the purchased item while paying for it.
4. Builds Credit
For young people, using a small amount of
consumer credit helps to establish a good credit
rating. A good credit rating becomes important if
you need to borrow for a financial emergency or
large purchase.
5. Temptation
A major disadvantage of consumer credit is the
false sense of empowerment that it provides.
6. More Expensive
When you pay cash for an item, the item’s cost is
obvious. When you purchase the item with a credit
card, however, you may continue to pay for the
interest on that purchase for months to come.
7. Unrealistic Lifestyle
Consumer credit can get you used to living a
lifestyle that is beyond your means. The rule is, do
not live within your means, live below your means.
• Bank Credit
1. Collateral
Because bank credit focuses on the borrowing
capacity of the individual or business entity, the
premise is a little different than the extension of a
line of credit.
2. Credit Worthiness
A basic philosophy of the banking system is that
when money is loaned out, there must be a
reasonable expectation of repayment of the loan,
plus interest. This means that looking at the overall
financial status of the applicant is important.
ACCORDING TO PURPOSE
• Agricultural Credit
It can be described as any of credit arrangement
used to finance agricultural transactions, including
loans, notes, bills of exchange and banker’s
acceptance.
• Industrial Credit
It refers to credit intended for financing usually
high capital outlay projects like mining, logging,
fishing, manufacturing, constructions of plants and
etc.
• Commercial Credit
It is often referred to as business credit or
commercial lending, commercial credit has to do with
the ability of a business to obtain goods and services
from a supplier.
• Real Estate Credit
It refers to credit extended for purposes of
construction, expansion and acquisition or
improvement of real estate properties such as land
and building.
• Export Credit
It refers to a credit that is connected to an export
transaction.
ACCORDING TO MATURITY
• Short-term Credit
The prearrangement of which the payment will
be made within one year or less.
• Medium Term Credit
It is a credit term whose maturity is more than a
year but less than 5 years.
• Long-Term Credit
It is a type of credit which carries the
maturity of 5 years or more.
ACCORDING TO MANNER OF REPAYMENT
• Lump Sum
Its basis is a credit arrangement in which the
payment will be made at one single instance at an
agreed time in the future.
• Installment
In contrast, installment basis is a manner of
payment wherein the total amount will be
settled via staggered mode in an greed span of
time and in an agreed amount.
ACCORDING TO RELEASE OF THE LOAN
• Lump sum release
It refers to one giving of the loan proceeds to the
debtor/creditor.
• Installment release
On the other hand, it refers to periodic giving
out of loan dependent on the pre-agreed basis
(based on project progress can be one of them).
ACCORDING TO SECURITY
• Secured Credit
It is a type of credit arrangement of which is
dependent on some specific item that would serve
as a security. This security could be in the form of
property, real or personal, tangible and intangible
which will be set aside to guarantee payment of the
obligation.
• Unsecured Credit/Character Loan
Unsecured credit is a type of loan where no
property is being used as a security for payment.
TRUTH IN LENDING ACT
What is the ‘’Truth in Lending Act?’’
RA No. 3765 requires the disclosure of finance
charges in connection with the extension of the credit.
What is the policy behind the Truth in Lending Act?
Protect the people from lack of awareness of the true
cost of credit by assuring full disclosure of such cost, with
a view of preventing the uniformed use of credit to the
detriment of the national economy.
Who are covered under the Truth in Lending Act?
It covers any creditor, which is defined as any person
engaged in the business of extending credit who
requires as an incident to the extension of credit, the
payment of a finance charge.
‘What is meant by a finance charge?
It includes interests, fees, service charges, discounts
and such other charges incident to the extension of
credit as may be prescribed by the Monetary Board of
the BSP.
When and how should this information be furnished to
the debtor or borrower.
The information enumerated about must be
DISCLOSED to the debtor or borrower prior to the
consumption of the transaction. The information must
be clearly stated in writing.
Any person who willfully violates any provision of this
Act or any regulation issued thereunder shall be fined by
not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than
one year or both.
Sources and
Bases of Credit
Sources of Credit
1. Individual Money Lenders
These are the unlicensed money lenders who have
access fund who are involved in activities trying to
make their money earn by making their funds available
to those who are in need in exchange of interest
payments.
2. Stores
Department stores are retail establishments which
specialize in satisfying a wide range of the consumer’s
needs for personal and other durable goods.
3. Pawnshops
A pawnbroker (or pawnshop) is an individual or
business that offers secured loans to people, with
items of personal property used as collateral.
The word pawn is derived from the Latin pignus,
for pledge.
4. Commercial Banks
Commercial banks are banking institutions that
are geared more toward the lending of money to
customers rather than focusing on generating or
raising money.
5. Investment Banks
An investment bank is a financial firm which
specializes in the sale and management of securities
such as stocks and bonds, rather than just handling
cash funds like a traditional bank.
6. Development Banks
These financial institution are dedicated to fund
start-up or new and upcoming businesses and
economic development project usually initiated by
the government by providing equity capital and/or
loan capital.
7. Savings Bank
A savings bank is a financial institution whose
primary purpose is accepting savings deposits.
8. Rural Banks
A rural bank is a financial institution that helps
rationalize the developing regions in developing
countries to finance their needs specially the
projects regarding agricultural progress in the
countryside.
9. Employees’ Cooperatives or Sinking Fund
Refers to a financial organization owned and
controlled by its members who can borrow at low
interest rates from a fund that they have saved as a
group.
10. Credit Unions
A credit union is a cooperative financial
institution that is owned and controlled by its
members and operated for the purpose of
promoting thrift, providing at reasonable rates and
providing other financial services to its members.
Other sources
Social Security System
SSS is the pension and insurance entity for private
employees in the Philippines.
Government Service Insurance System
It has the same function as the SSS, the only difference
is the membership. GSIS is the pension and insurance
entity for government employees in the Philippines.
Home Development Mutual Fund/Pag-ibig Fund
It is a mutual fund company whose members are from
both private and government employment.
Bases of Credit
The word ‘’credit’’ has been derived from the
Latin word creditum. It means trust.
1. Capacity
This has something to do with the managerial
ability of the borrower.
2. Capital
This refers to the resources owned by the
borrower such as properties and other liquid
assets over and above his obligation.
3. Character
This refers to the personal integrity of the
borrower.
4. Collateral
Usually, title of land, ownership of building and
machine as security of the loan.
5. Condition
Conditions in the community, industry, or the
whole economy affect the ability of the borrowers
to pay their loans.
6. Currency
This talks about the stability of the currency of a
country.
7. Confidence (The Real Foundation of Credit)
It refers to the creditor’s assessment of debtor’s
attitudes.
