Money and Credit Test - 7

Cheque is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The facility of the cheques against demand deposits settles the payment without the use of cash, demand deposits are widely used as means of payment and constitute money in the modern economy.

15% of the deposits as cash in the bank is kept to pay the depositors who might come to withdraw money from the bank on any given day. The major portion of the deposits is used by the banks to extend loans.

Credit is an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit also refers to an accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet.

Credit helps to meet the working capital needs of production, on going expenses of production, complete the production on time and thereby increase one’s earnings. Credit is best used to meet short-term working capital needs that exist for less than 12 months.

Repayment of the loan is crucially dependent on the success of the business or venture for which the loan is taken and ultimately the income of it. Therefore if more income is generated in lesser time, loan will also be repayed in lesser period of time.

Farmers usually take crop loans at the beginning of the season in order to meet their requirements, then they repay it after the harvest.

A debt trap is a situation in which a borrower is led into a cycle of re-borrowing, or rolling over, their loan payments because they are unable to afford the scheduled payments on the principal of a loan. The debt is difficult or impossible to pay typically because high interest payments prevent re-payment of principal.

A lender is an individual, a public or private group, or a financial institution that makes funds or loans available to another with the expectation that the funds will be repaid. However every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

Collateral is an asset owned by the borrower such as land, building, vehicle, livestock, deposit with the bank, etc. and uses this as the guarantee to the lender untill the loan is paid. If the borrower fails to repay the loan, the lender has the right to sell the asset or the collateral to obtain the payment.

Terms of credit is the agreement between a seller and buyer that lists the timing and amount of payments the buyer will make in the future. It includes interest rate, collateral documentation requirement and the mode of payment. The terms of credit vary substantially from one credit arrangement to another.