MODULES FOR CREDIT AND COLLECTION

BY : Nestor S. Asunto

CBM-05-12 Module/6th January 2020

 UNIT 2

CLASSES AND KINDS OF CREDIT

COMPETENCIES

1. To Identify the classes and kinds of credit

2. To find out the importance of each classes and kinds
3. To identify the advantages and disadvantages of each kinds and classes
4. To enumerate and classes and kinds of credit
5. To determine the precautions in buying on installment

ENDURING UNDERSTANDING

In as much as credit is by and large, the product of necessity, it follows that different circumstances calling for assistance and remedies
at one time or another have been responsible for the birth of numerous classes and kinds of credit familiar to the world today. While credit may
be classified in a number of ways, however, the most common basis is according to the purpose for which credit is to be used. Thus, we have
what are known as personal credit, mercantile credit, bank credit, industrial credit, agricultural credit, investment credit, export credit and
public or government credit.

Having indicated the various classes and kinds of credit, we are now ready to take a comprehensive look at each by taking into account
their real nature and significance.

Essential Questions:

1. Describe the meaning of each kinds of credit;

2. Identify the scope of each kind and classes;
3. Identify the advantages and disadvantages of each kind and classes;
4. Compare the classes and kinds of credit.
5. Describe the importance of credit in the economy.
CBM-05-12 Module/6th January 2020
Values Integration:

1. Decision-making
2. Economic-Conscious
3. Dependability
4. Responsibility
5. Trustworthy

Teaching Strategies:

1. Lecture-Discussion
2. Reporting
3. Case Study
4. Self-directed learning

Materials Needed:

1. Hands-out
2. Modules
3. Online resource(internet connection)

ACTIVITY 1:
LESSON 1: CLASSES AND KINDS OF CREDIT
As you go through this module, remember to
search for the answers to the following questions:

1. In your own understanding, WHAT IS CREDIT CARDS ?

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CBM-05-12 Module/6th January 2020

ACTIVITY 2:

1. Read the text below and answer the questions that follows:

Personal Credit

The origin of credit is lost in the midst of antiquity. No one knows exactly when and how credit begun. However, to be sure, thinking
men acting as economic beings who were unable to provide themselves with the basic things they needed in life found that the only way out for
them was to borrow from those who had a surplus, Thus, a farmer suffering from poor harvest became constrained to borrow from a a fellow
farmer the grains and cereals that his family needed which he promised to return in kind and of the same amount after the next harvest.

Individual credit has, through the centuries, been a very outstanding one because no one in his life knows for certain when an
emergency or an opportunity will force him into using credit. Sooner of later most consumers find a reason for using credit. A student, for
instance, may need a loan to finance his education. A family inspite of inadequate funds, may decide to buy a house. A housewife may need to
buy a refrigerator on deferred payment.

Most personal credit, by and large, is used by individuals to buy consumer goods intended to provide immediate satisfaction to their
wants and needs. Thus, invariably, they are also called as consumer credit. Although homes are classified in a broad way as capital goods,
nevertheless, home mortgage credit is generally considered as an example of personal credit.

Kinds of Consumer Credit

A. Charged Account

Charge account as practiced by sari-sari store, which are spread throughout the breadth and span of the nation, are no less common just
as its acceptance is no less popular. The use of of charge account has not only accounted for increasing sales volume but, moreover, for
facilitating the process of consumption. Under the charge a charge account, a number of purchases may be made from time to time, which
obligations are discharged in one lump sum. Payment of such obligations coincide more or less with dates or days when individual money-
earners receive their incomes.

Proponents of charge accounts list its advantages as follows:

1. It is a very convenient way of shopping

2. It eliminates the inconvenience as well as the danger of carrying too much money

CBM-05-12 Module/6th January 2020

 3. Charge accounts enable customers to buy goods only at the time they want them

4. Charge accounts enables consumers to obtain goods even before they have the money

5. Charge accounts provide a valuable means of reference in many business transactions

B. The use of Credit Cards

Within recent years, there has been observed the wide use of credit cards as an adjunct, of charge account. This type of device serves to identify
credit customers as those to whom the store has given a symbol of its confidence in them. The tangible evidence of their charge account
constitutes also a reminder of the store and thus increase the buyer’s patronage.

Credit cards, however, pose problems which are not found in the use of signature identification. Another difficulty grows out of the loss
or theft of credit cards and their subsequent use by unrecognized finders. Most credit cards may be used to purchase goods or services at only
one or a limited number of types of retail or service establishments.

C. Installment Credit

The most common type of consumer credit today is installment sales or purchase credit. A number of individuals term it as “ buying on
time.” Through this method, the buyer is often asked to make a partial payment at the time of purchase, termed down payment. The
balance is expected to be paid with a series of regular payments. As a policy and practice, a buyer of goods on installment credit is
required by the selling company to sign a formal agreement known as an installment contract.

WHAT DO I REALLY KNOW?

1. As a student, why do you think that personal credit is also known as consumer credit? Write your answers in the space
provided below.
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CBM-05-12 Module/6th January 2020
 2. As stated in this module, there are some of the advantages in buying charge accounts. Can you give or cite some
disadvantages in charge accounts? Support your answers.
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3. In your own research and understanding, what are the precautions in buying on installment. Discuss your answer.
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CBM-05-12 Module/6th January 2020

LESSON ll : CLASSIFICATION AND SOURCES OF CREDIT
 There are two equally important purposes in the classification of credit, first, as a quick guide to those who need them, as to where and
how to get them, and second, to guide those who provide them as to where to find these users of funds.

Additionally, employees of lending organizations, where informed of the type of credit needed by clients, could easily look for the loan
terms. Such as interest rates, requirement, maximum amounts, properties required for security. Simply stated, the information exchange
between providers and users of credit is not only facilitated, but also misunderstanding that could result in costly problems are avoided.

Credit is generally classified according to purpose for where the loan funds are intended to be used:

A. Agricultural credit. These are loans to be used in the cultivation and improvement of farmlands, or in the production of agricultural
products(poultry, pig farm, rice and corn vegetables, tilapia). Some of the more common agricultural loans are:

 Term Loan. This is usually a secure loan( collateralized by the farm property where the loans funds are to be used). The loan is intended for
the development or improvement of the farm . Ex. Poultry building, dikes for rice farming. It is referred to as a time or term loan because
the loan is for a definite period of time, called term, with a definite maturity usually one year.

 Crop Loan. This is called a “crop’ “ loan because it finances the production of crops. The maturity of the loan coincides with the harvest
cycle. It is borrowed before the planting season and is paid after harvest time. The proceeds of the loan are to be used for fertilizers and
farm chemicals.

 Commodity or quedan loans. This is a loan to finance the marketing of harvested crops. This type of loan (commodity loan) is also used for
non-farm commodities, by wholesalers or manufacturers, for ex. , using their finished goods inventory in a warehouse as collateral. Banks,
however, will refuse to lend unless the warehouse is owned and controlled by another entity and not the borrower.

B. Commercial Credit. These are loans, or credit arrangements, for the purpose of financing the production and marketing of
commodities. These could be loans granted by banks to businesses, or by business establishments to other businesses.

Some examples are

CBM-05-12 Module/6th January 2020
 - Loans for the purchase of raw materials by a manufacturer

- Credit provided by the supplier or raw materials

- Credit provided by the manufacturer, in the form of finished goods, to the wholesalers and retailers.

C. Industrial Credit. Are loan used to finance the construction of factory buildings of the purchase of machinery and equipment. In this
category are bonds ( 20 to 30 years) and long-term bank loans.

D. Consumer Credit. These are loan funds granted to individuals by banks, coops, department stores, credit card companies, savings and
loan associations, the GSIS and SSS ( for salary loans).

E. Commodity Loans - For non-farm products, using warehouse receipts. Commodities or goods are either finished product or raw
materials. Credit could also be classified according to maturity.

F. Unsecured Loans- Are loans also called character or clean loans, and also signature loans. The loan is granted simply because of the
borrower’s reputation or character, thus the term ‘ character’ loan and all the lender wants is the ‘signature’ of the borrower on the promissory
note, which is the only document required.

ACTIVITY 3.

CBM-05-12 Module/6th January 2020

1. Mr. B obtained a P 100,000.00 cash loan, using a 3-year old motorcycle with a market value of P 50,000.00. Is this loan secured? Suppot
your answer.

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2. What kind of loan would you offer to a poultry farmer who wants to build his poultry housing for broilers? What would be the appropriate
term or maturity?

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3. REZBRI Shoppers Mart obtained cosmetics from Cosmetique Mfg. For 90 days. What kind of credit?

CBM-05-12 Module/6th January 2020

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4. A wealthy entrepreneur, with an excellent credit reputation, co-signed a promote of Karp ( borrower ) on a P 80,000.00 loan. He
guaranteed the loan. Is this a secured loan? What kind of loan?

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REFERENCES:

Briones, Jose Glenn, ( 2005) Textbook on Credit and Collection Management

Miranda (2002) Textbook on Credit and Collections

CBM-05-12 Module/6th January 2020

CBM-05-12 Module/6th January 2020
CBM-05-12 Module/6th January 2020
CBM-05-12 Module/6th January 2020