What does it mean credit term?

Credit Terms Meaning

Credit terms are the payment terms and conditions made by the lending party in exchange for the credit benefit. Examples include credit given by suppliers to buyers of products, and the terms may be 3/15, net 60, which simply means that even though the amount is due in 60 days, the buyer can avail of an additional discount of 3% if they pay within 15 days.

Nội dung chính Show

• Credit Terms Meaning
• Factors of Credit Terms
• Credit Terms concerning Modes of Payment
• Relevance and Uses of Credit Terms
• Recommended Articles
• What is credit terms example?
• What is a 30 day credit term?
• What is normal credit term?
• What does it mean to apply for credit terms?

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked
For eg:
Source: Credit Terms (wallstreetmojo.com)

Factors of Credit Terms

There are 4 factors to any type of credit terms in the market.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked
For eg:
Source: Credit Terms (wallstreetmojo.com)

#1 – Time

The beneficiary is allowed a time benefit (which is why it is not a cash payment), so the transaction can be settled before the actual payment. Typically, the time limits are set before the transaction is made.

#2 – Amount

The amount to be availed by the beneficiary is limited based on their credibility. The credit-providing party first verifies this credibility based on credit scores, ratings, and other performance-related indicators. The credibility is higher than the credit limit.

#3 – Interest

Based on the type of credit availed, there is a charge against such benefit to the beneficiary. For example, Mr. A takes a car loan of $100,000 from ABC Bank for 5 years, which is to be repaid along with a 10% interest /annum. This interest provision is the fees charged by the bank in exchange for the credit facilityCredit Facility is a pre-approved bank loan facility to businesses allowing them to borrow the capital amount as & when needed for their long-term/short-term requirements without having to re-apply for a loan each time. read more they provide. In some cases, like credit cards, there is a one-time fee charged by the credit card provider to the beneficiary party. In other cases like post-dated checks, there may not be any such charge imposed on the payer; however, the deal may get only settled after the amount gets settled in the bank. In this case, there is no cash charged; however, the delay in availing services can be considered payment in kind.

#4 – Default Terms

Due to the risk involved in repayments, the credit providing party always has specific terms related to default. These terms include interest charges, late payment fees, excess payments, or in some cases, termination of a contract. For example, in the above case of Mr. A’s car loan, the bank poses a condition where if Mr. A defaults, interest at the rate of 2% per month shall be charged from the due date until payment of such amount.

Credit Terms concerning Modes of Payment

Below are credit terms vis-a-vis payment modes.

#1 – Post Dated Check

• The deal may only settle after the transaction settles between the payeeA payee refers to a person, business, government, or any other entity that receives payment for providing goods or services.read more and payer banks.

#2 – Credit Cards

• Time benefit of particular days by the respective service provider within the billing cycleThe billing cycle is the time period between one billing statement and the next billing date that companies generate for its services and products sold to the customers. The cycle could be monthly, quarterly or even annually. read more.
• No extra charge on the transaction amount if the bill is paid within the due date.
• Amount paid after the due date (and sometimes beyond the agreed-upon grace period)Grace periods are extra days given after the due date to undertake an unfulfilled obligation without penalties. They are a common instance in the financial world and are usually offered to clients who apply for a credit card, student loan, insurance, or mortgage to attract more customers.read more, interest shall be levied.
• Credit Card rental, typically on an annual basis, is to be paid as decided between provider and service availing party.

#3 – Secured Loans (Debts)

• Interest is charged to the borrower at a periodic rate and is generally prevalent in the markets.
• In case of default, the borrower is charged with an additional late charge amount on the due amount until paid.
• Collateral is kept as security by the lender until complete repayment by the borrower.

#4 – Unsecured Loans (Debts)

• Unsecured loansAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more have a higher degree of default risk by the borrower. Hence the terms are more stringent than the secured loans, sometimes customized between the lender and the borrower based on the transaction.
• There is no collateral in such loans, so the interest repayment rate is higher than secured loansSecured loans refer to the type of loans approved and received against a guarantee or collateral. If they fail to do so, the lending institution acquires the collateral to compensate for the amount that the borrowers were allowed.read more.
• Default terms are more stringent and sometimes lead to the cancellation of contracts or recovery from the sale of the borrower’s other assets.

• Credit terms can be created for services imparted as well. For example, a painting company would get only paid after the job is completed, or an employee in a company gets paid only upon the end of the month or cycle.
• Most of the time, for any service-related credits, there are contracts made by the provider with the party who avails the service.

Relevance and Uses of Credit Terms

• The Buyer of Credit is Seller of Risk

The party which avails credit from this service provider transfers its risks to the service provider in exchange for some charges by the provider. Hence it is free from credit risk, which benefits them to make the required transaction in time without delay. But on the other hand, the service provider is said to be the buyer of such risk.

• Fluent Circulation of Money in Markets

With the help of such a credit system in the economy, there is a lesser chance of blockage of money in circulation unless the economy gets into a severe crisis. If the repayment risks are also taken care of, this system leaves very few chances of failure.

• Option to the Cash System

This system acts as an option for the preliminary cash system.

Conclusion

Credit Terms have evolved dynamically in money markets and are now at a very advanced stage, with every service provider trying to provide more and better services. Today, almost every materialistic item can be bought on credit, and there are many easy options to avail of the same. However, we should always keep in mind that the success of this system depends completely on the credit terms set by the service providers and how well they are implemented during the respective term.

Recommended Articles

This article has been a guide to what Credit Terms are and their meaning. Here we discuss the top 4 factors of Credit Terms and how it varies vis-a-vis the modes of payments. We will also discuss the relevance and its uses. You can learn more about it from the following articles –

• Definition of Credit Risk
• Line of Credit
• Letter of Credit Meaning
• Debtor vs. Credit