Last Updated : 02 Aug, 2023
The economy runs with a proper cash flow in the market, and the banks maintain this cash flow by lending loans to people and institutions. However, as there is a variety of loans that banks offer, similarly every loan has its special terms and conditions.
Terms of Credit
Loan and credit help the economy move forward as it leads to development, thus leading to economic growth. However, in some cases, some loan becomes bad loan (when the borrower is not able to repay the loan). Thus the GOI and RBI have issued some strict guidelines for the issuance of the loan, based on which the credit is offered in India. The loan and terms of credit are discussed in detail below in this article.
What is Credit or a Loan?
A credit or a loan can be simply referred to as a certain amount of money borrowed by a bank or any other financial institution. The borrowed amount must be returned by the borrower to the bank along with the application within a specified timeline. If a person/institution fails to do so, the banks have the right to acquire and sell the collateral kept as the security of the loan.
What are the Terms of Credit?
Each loan has a certain rate of interest that a borrower needs to pay along with the principal amount. Also along with the rate of interest, there are certain terms and conditions of every loan. For example, the borrower must repay the principal amount along with the interest within the specified time. In addition to this in some loans banks also keep collaterals as security of the loan (Collateral can be any asset such as land, vehicle, bank deposits, buildings, etc. that has a certain value.
In case a borrower failed to repay the loan amount then the bank is free to sell these collaterals and recover the loan amount. Each loan in India has its different terms and conditions and some of the common types of loans are discussed below:
Rate of Interest
Rate of interest is one of the primary terms of credit that applies to almost all kinds of loans except education loans. Whenever a bank offers a loan of a certain amount to a borrower, the bank charges a specified rate of interest on it. And this rate of interest needs to be paid off by the borrower to the bank along with the principal amount. The rate of interest may vary with the type of loan, the personal loan’s rate of interest ranges between 10.5% – 21% per annum.
Collaterals
Collaterals can be simply understood as an asset, or belonging that has a certain value, which is kept as loan security by the bank while offering the loan to the borrower. Collateral can be land, vehicle, precious metals, bank deposits, bonds, etc. The collateral plays a crucial role in a loan if a borrower fails to repay the loan within a specified period of time. Then the bank can sell that collateral to recover the loan amount.
Documentation Required
Taking a loan is a quite tedious process and requires plenty of documentation. The documents required for a loan may vary with the type of loan you are applying for. However, there are certain documents that as a borrower you need to submit to the bank such as your income statement, current debt, details of assets, your residence proof, identity proof, etc.
Mode of Repayment
The mode of repayment includes the mode of payment via which the loan amount is going to be prepared, the number of installments, and the duration of the loan. The borrower must need to repay the whole loan within a specified time, and if someone fails to do so, can face bank penalties, can lose their collaterals, and even in some critical cases may also need to face judicial custody.
House Loan
It’s one of the most common loans, that many banks offer in India. The housing sector has been one of the major indicators of economic growth for the past many years. That’s the reason why banks are also offering housing loans at lower interest rates. To be eligible for a house loan, the borrower first needs to submit all the legal documents to the bank. Once these documents get approved bank verifies the collateral that is to be kept as loan security. Once the loan is approved by the bank, the borrower gets the amount in certain installments as per the agreed terms. The terms of credit in a house loan mainly include the documents, rate of interest, mode of payment, collateral, and the duration of the loan.
FAQs on Terms of Credit
Q 1. What is the average rate of interest on home loans?
Answer-
The average rate of interest on home loans in India varies between 6%-15% per annum, and this rate varies with the banks.
Q 2. Is collateral necessary in all loans?
Answer-
No, not all loans require collateral, there are many financial institutions that do offer loans without collateral but they are unsecured loans, while the ones with collateral are secured ones.
Q 3. Do all come with interest?
Answer-
No, there are many loans that are interest-free such as education loans, interest-free car, home loans, etc.
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FAQs
What are the Terms of Credit? Each loan has a certain rate of interest that a borrower needs to pay along with the principal amount. Also along with the rate of interest, there are certain terms and conditions of every loan.
What are the terms of credit class 10 economics? ›
Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
What are the 4 terms of credit? ›
Terms of credit have elaborate details like the rate of interest, principal amount, collateral details, and duration of repayment. All these terms are fixed before the credit is given to a borrower. Q. Which of the following does the terms of credit NOT include?
What is collateral in terms of credit class 10? ›
Collateral is an asset or form of physical wealth that the borrower owns like house, livestock, vehicle etc. It is against these assets that the banks provide loans to the borrower. The collateral serves as a security measure for the lender.
Why are terms of credit required for a loan or credit? ›
Terms of credit are required so that the borrower knows the conditions to take the loan. The collateral, in the form of security or guarantee, is given to the lender until the loan is repaid. If the borrower fails to repay the loan, the lender has all the rights to sell the assets or collateral to obtain the payment.
What is the purpose of credit class 10th? ›
Credit means loans. It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment. Role of credit for economic development: (i) Cheap and affordable credit is crucial for the country. s growth and economic development.
What is the explanation of credit terms? ›
Credit terms are simply the time limits you set for your customers' promise to pay for their merchandise or services received.
What is the 4 Cs of credit? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa.
What are the four 4 classifications of credit? ›
The four types of credit are installment loans, revolving credit, open credit, and service credit. All of these types of credit increase your credit score if you make your payment on time and if your payment history is reported to the credit bureaus.
What are the three components of credit terms? ›
The conditions under which credit will be extended to a customer. The components of credit terms are: cash discount, credit period, net period.
The 5 C's of credit are character, capacity, capital, collateral and conditions. When you apply for a loan, mortgage or credit card, the lender will want to know you can pay back the money as agreed. Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more.
What is debt trap class 10? ›
A debt trap means the inability to repay credit amount. It is a situation where the debtor could not be able to repay the credit amount.
What is the difference between a pledge and a collateral? ›
A pledge is a legal instrument used to secure a debt to ensure payment to a creditor. This technique differs from a pledge in that the collateral offered is an intangible movable asset, such as a receivable or a share in the company's capital.
What are the four terms of credit class 10? ›
The terms of credit in a house loan mainly include the documents, rate of interest, mode of payment, collateral, and the duration of the loan.
What are conditions in terms of credit? ›
Conditions. Lenders may want to know how you plan to use the money and will consider the loan's purpose, such as whether the loan will be used to purchase a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.
What are the five important terms of credit explain? ›
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
What is the economic term credit? ›
The word "credit" has many meanings in the financial world, but it most commonly refers to a contractual agreement in which a borrower receives a sum of money or something else of value and commits to repaying the lender at a later date, typically with interest.
What are credits in economics? ›
What is Credit? Credit is the ability of the consumer to acquire goods or services prior to payment with the faith that the payment will be made in the future. In most cases, there is a charge for borrowing, and these come in the form of fees and/or interest.
What are the 4 Cs of credit definitions? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa.
What do you mean by the term credit? ›
Credit is an agreement between a lender and a borrower that allows the borrower to obtain funds, goods or services now and repay them later. Credit can also refer to your history of borrowing and repaying money.
