Chapter 4: Credit, Its Uses, and Risks

12 Questions

Which of the following is NOT a key characteristic of credit according to the text?

Credit is always done at a present date

What is the purpose of the Truth in Lending Act (TILA) as described in the text?

To protect consumers from unfair or deceptive practices by creditors and lenders

Which type of credit is described as 'credit that allows you to borrow up to a certain limit and repay it over time (use it repeatedly)'?

Revolving credit

Which type of personal credit is 'usually granted for the purchase of expensive consumer items'?

Personal loan credit

Which type of credit is described as 'credits extended by one businessman to another businessman'?

Commercial or mercantile credit

Which type of agricultural credit is used to 'finance the selling and distribution of farm crops'?

Commodity loan

Which of the following is NOT a function of credit?

Eliminating the need for a banking system

Which characteristic of credit implies that it involves a promise to repay?

Credit as a Fiduciary Contract

Which of the following best describes the role of credit in promoting stability in the economy?

It regulates the money supply and interest rate

Which function of credit is directly related to the government sector?

Helping the government meet its temporary and permanent financial needs

Which characteristic of credit implies that it involves a monetary obligation?

Credit as a Pecuniary Contract

Which of the following is NOT a characteristic of credit mentioned in the text?

Credit as a Bilateral Contract

Study Notes

Characteristics of Credit

Credit involves risk, as there's a possibility of the obligation not being paid
Credit always involves futurity, with payment done at a future date

Truth in Lending Act (TILA)

Aims to protect consumers from unfair or deceptive practices by creditors and lenders
Implemented by Republic Act No. 3765 (1963)
Regulated by the Monetary Board of the Central Bank of the Philippines

Types of Credit

Revolving credit: allows borrowing up to a certain limit and repayment over time
Installment credit: requires fixed repayments over a specified period
Open credit: requires full repayment at the end of each billing cycle
Service credit: allows receiving a service now and paying for it later

Personal Credit

Obtained for personal use
Three types:
- Service credit (e.g., from doctors, lawyers, dentists)
- Retail credit (e.g., regular charge account, revolving charge, installment plan)
- Personal loan credit (e.g., for expensive consumer items)

Commercial or Mercantile Credit

Credits extended by one businessman to another
Merchandise credit or trade credits: manufacturers extend credit to wholesalers and retailers
Generally unsecured and short-term

Bank Credit or Bank Loans

Granted by banks to finance short-term credit needs
Repayment is oftentimes done within a short period due to fast goods turnover

Export and Import Credit

Export credits: finance the selling of goods outside the country
Import credit: finance the buying of goods from other countries

Investment Credit

Long-term borrowing for business enterprises
Supports working capital requirements of the business

Agricultural Credit

Credits given to farmers for:
- Crop production (crop loan)
- Livestock breeding (livestock loan)
- Farm development and improvement (agricultural time loan)
- Selling and distribution of farm crops (commodity loan)

Functions of Credit

Economic Benefits

Reduces need for cash transactions and saves costs
Facilitates exchange of goods and services and transfer of funds
Stimulates and finances production in anticipation of demand
Promotes domestic and international trade
Allows banks to create more credit out of deposits
Provides financial accommodation to industries
Enables consumers to buy durable goods on installment basis
Helps the government meet temporary and permanent financial needs
Maintains economic stability by regulating money supply and interest rate