Types of Credit for Consumer Purchases and Business Expansion

Credit refers to a contract between a bank or another entity and a borrower that enables the latter to receive money, services, or goods in exchange for a repayment within a specified period of time. Borrowers have to pay back the outstanding balance, along with the interest charges that apply. Credit comes in different varieties, including trade, bank, consumer, investment, and international.

Consumer Credit, Types, and Payment

This is a type of debt incurred by consumers for the purchase of goods and services. It is different from other types of loans in that people use it to buy non-investment goods. Borrowers purchase cars, trailers, food, vacations, TVs, household appliances, etc. There are different types of consumer debt, including single lump-sum, installment cash, and installment sales. The latter makes it possible to buy goods, including major appliances, and to make monthly payments. This practice is known as store financing. Installment cash is another variety that allows borrowers to take out a loan. They can use the money to make purchases, go on vacation, buy a car, and make home improvements. Single lump-sum credit is yet another type, and this category includes pawnshop and payday loans. Borrowers are required to repay the loan in a lump sum.

Investment Credit

This category includes loans that are taken to invest in real estate, plants, machinery and equipment, and other items that generate profits. It is tax deductible meaning that businesses can deduct some of their expenses for tax purposes. There are different types of loans that businesses take advantage of. These include debt financing, short-term loans, commercial loans, business lines of credit, and others. Investment credit includes two broad categories of financing – asset based and acquisition loans. An asset based loan is a type of secured debt for which collateral is required. The money can be used for different purposes, including the purchase of assets such as computers, office equipment, machinery, etc. Acquisition loans are offered to companies that seek to acquire a property or business and expand their operations. Construction, construction improvement, and development loans are other forms of financing. Development loans are designed to help business owners to improve or develop a property. Rehab or construction improvement loans are slightly different in that borrowers use the money to purchase a real estate property and remodel and enhance its features. Businesses also apply for construction loans to build plants and other properties.

Public Credit, Types, and Methods of Repayment

In fact, this is government debt that is owed by local, municipal, state, and government authorities. The authorities use different instruments to borrow, including treasury bills, bonds, notes, and other securities. The difference between them is in their maturity. Governments take different approaches to debt repayment, and some of them are buying government stock, using surplus budget, and through terminable annuities and sinking fund. A sinking fund is one option to pay off government debt. This is a type of fund that serves to collect revenue and use a portion of the money to repay debt on an annual basis. Governments also use their surplus budget to pay off loans provided that there is a significant surplus. Terminable annuities are yet another option and a method of reducing government debt. They are held by funds, government departments or persons. There are two types of terminal annuities, and the first type cannot be altered once issued. The second type can be modified, but some form of formal arrangement is required. Purchasing government stock is yet another way to reduce public debt. Finally, the authorities can use capital levy and conversion methods as an alternative to writing off debt, which is a last resort. The latter involves asking creditors to write off bad debts.

Other Types of Credit

In addition, there are real estate, bank, commerce, and international types of credit. Real estate loans are used for the purchase of commercial or residential real estate. Commercial lenders offer financing to businesses that seek to fund significant capital expenditures. Companies can choose from unsecured loans, business lines of credit, and term loans. These lending products are designed for businesses that have a more limited access to the equity and debt markets. Finally, there are mortgages, loans, and other lending solutions that are offered to international clients. Financial institutions extend loans to borrowers who plan to purchase real estate, buy their first home or vacation property, or to refinance. There are, for example, expat and non-residential mortgage loans.

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