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Credit and Trust

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Questions and Answers

What is credit based on?

A financial transaction

A formal agreement

A form of trust (correct)

A legal contract

Why would a lender extend credit?

Because the borrower has collateral

Because the borrower has a steady income

Because the lender believes the borrower has the ability and willingness to repay (correct)

Because the borrower has a good credit history

What is expected of the borrower?

To pay interest on the borrowed money

To live up to the trust by repaying the lender (correct)

To invest the borrowed money

To use the borrowed money for a specific purpose

What is the basis of the lender's decision to extend credit?

The lender's assessment of the borrower's ability and willingness to repay Signup and view all the answers

What is the relationship between the lender and the borrower?

A trust relationship Signup and view all the answers

What happens to your future income when you take on debt?

A portion of it is committed to repay debt Signup and view all the answers

What is the effect of debt repayment on your ability to take on additional credit?

It reduces the amount of credit you can take on in the future Signup and view all the answers

What is the relationship between debt repayment and your income?

A larger portion of your income is allocated to debt repayment Signup and view all the answers

Why does debt repayment reduce your ability to take on additional credit?

Because you have less money available to repay additional debt Signup and view all the answers

What is the outcome of committing a portion of your future income to debt repayment?

You have less money available for additional credit Signup and view all the answers

Study Notes

Credit and Trust

Credit represents a form of trust established between a lender and a borrower.
The lender's trust in the borrower is based on the borrower's ability and willingness to repay the loan.
The borrower's ability to repay is a key factor in the lender's decision to extend credit.
The borrower's willingness to repay is also a crucial factor in the lender's decision to extend credit.
The borrower is expected to repay the loan, thereby upholding the trust established with the lender.

Taking on Debt

When you use credit cards, loans, or other forms of credit, you commit a portion of your future income to repay the debt.
This reduces the amount of money you have available to take on additional credit in the future.
A larger portion of your income is already allocated to debt repayments, limiting your financial flexibility.
Debt repayment commitments reduce your future disposable income.

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Description

Learn about the concept of credit as a form of trust between a lender and a borrower, and how it is established based on the borrower's ability and willingness to repay.