Chapter 4: Functions of Credit

Functions of Credit

• Reduces the need for cash transactions and saves the cost and risk of issuing and carrying money.
• Facilitates the exchange of goods and services and the transfer of funds from one place to another.
• Stimulates and finances production in anticipation of demand.
• Enables the expansion of both domestic and international trade.
• Allows banks to create more credit out of a small amount of deposits.
• Provides short-term and long-term funds to industries for their development and growth.
• Enables consumers to buy durable goods on installment basis.
• Helps the government to meet its temporary and permanent financial needs.
• Helps to maintain the stability of the economy by regulating the money supply and the interest rate.

Characteristics of Credit

• A bipartite contract between two parties (debtor and creditor).
• A pecuniary contract expressed in terms of money.
• A fiduciary contract based on trust and confidence.
• Involves risk, with the possibility of the obligation not being paid.
• Always involves futurity, with payment on credit done at a future date.

Significance of Credit

• Helps achieve financial goals.
• Provides access to more options and opportunities.
• Helps build wealth and save money.
• Helps cope with emergencies and unexpected expenses.
• Helps maintain a stable and healthy economy.

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) and regulated by the Monetary Board of the Central Bank of the Philippines.

Kinds of Credit

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

Types of Credit

• Personal credit: obtained for one's use, including service credit, retail credit, and personal loan credit.
• Commercial or mercantile credit: credits extended by one businessman to another businessman, including merchandise credit or trade credits.
• Bank credit or bank loans: granted by banks to businessmen to finance short-term credit needs.
• Export and import credit: financing the selling of goods outside the country or buying of goods from other countries.
• Investment credit: long-term borrowing for financing business enterprises and supporting working capital requirements.
• Agricultural credit: credits given to farmers for the development, improvement, and cultivation of their lands, including crop loans and livestock loans.