Explain any four terms of credit with examples.

Credit is an essential financial concept that allows individuals and businesses to borrow money to finance various needs and investments. Here are four key terms of credit, along with examples:

1. Interest Rate: The interest rate represents the cost of borrowing money and is expressed as a percentage of the loan amount. When a borrower takes a loan, they must repay the principal amount along with the additional amount charged as interest by the lender.

For example, suppose you borrow $5,000 from a bank at an annual interest rate of 6%. At the end of the year, you will owe the bank $5,000 + ($5,000 x 0.06) = $5,300.

2. Collateral: Collateral is an asset that a borrower pledges to the lender as security for the loan. This asset acts as a guarantee for the lender, reducing the risk of lending money. If the borrower fails to repay the loan as agreed, the lender can seize and sell the collateral to recover the outstanding debt.

For example, when taking out a secured personal loan, you might offer your car as collateral. If you default on the loan, the lender can repossess and sell your car to recover the loan amount.

3. Documentation: Documentation involves the preparation and submission of all necessary paperwork and records related to the credit application. It includes information about the borrower’s identity, financial status, credit history, and the terms and conditions of the loan.

For example, when applying for a business loan, you will be required to submit documents such as business financial statements, tax returns, bank statements, and a business plan to support your loan application.

4. Mode of Repayment: The mode of repayment specifies how the borrower will repay the loan amount to the lender. It includes details such as the frequency of payments (monthly, quarterly, etc.) and the duration of the loan term.

For example, if you take a mortgage loan for a house, the mode of repayment could be monthly instalments over 30 years. Each month, you will make a fixed payment until the loan is fully repaid.

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