The Basics Of Credit: The Roles Of The Lender And Borrower

The Basics Of Credit: The Roles Of The Lender And Borrower

In the world of financing, credit means the borrowing of certain resources from one party to another. The party which gives the resources is called the lender, while the other one that receives the resources is called the borrower. Since the borrower does not have to pay immediately, it then forms a debt which is then paid off according to the terms and conditions that have been agreed to by both parties.

Basically, both parties must meet halfway for a smooth flow of their financial credit. Sometimes problems occur along the way and so both parties end up seeing each other in serious legal proceedings. The resources which the lender can offer are mostly dependent on the investment that it has made for its company. Also, the credit limit given to a credit card applicant is dependent to the creditworthiness of the borrower.

What Is Creditworthiness?

Creditworthiness generally gives an idea just how many resources the borrower is capable of acquiring as debt. It also tells if the borrower has the sufficient means in order to pay it off. Most of the time, creditworthiness can be computed depending on the borrower's regular income, credit history and other sources of funds. 

Remember that it is not really necessary that credit is automatically translated to monetary funds. Actually, at times credit can also be in the form of services, goods and even properties. However, since credit is widely used in practically all sorts of transactions, it is simply as good as money. And with the existence of credit cards, people can acquire certain goods and services in return of an accumulated credit in their account. This gives them the capacity to buy different kinds of items in the market and pay for them at a later time. Such a thing is common to most people nowadays with the presence of consumer credit.

Consumer Credit

This type of credit is in the usual forms of credit cards, personal loans and mortgages. Depending on the borrower's creditworthiness, he is then given a credit line in which he can use in order to purchase goods, services and properties in the exchange of a later payment. The higher the creditworthiness of the borrower, the greater the chances he has of getting a much higher credit line from his lender.

However, though it may be an ideal setup especially for people who do not have the necessary outright resources, the backlog of credit is the additional value that is put together with the original debt. This additional value can come from service fees and interest rates. Some of these rates are already set out by the lender or the lending institution. However, at times they may be optional depending on the negotiation that may occur between the lender and the borrower. There may also be varying ways for these rates to be included in the debt. Some are included in the monthly payments while some can be in the form of annual percentage rates.

In general, besides from gaining profit from the debt, lenders do require additional fees to ensure that the borrowers are honest and true in their responsibility of paying off their debt. At times these fees are even increased in the event that the borrower does not pay off his credit in the required time.