Credit refers to an agreement wherein a borrower receives something of value (for example goods or a service) with the understanding that the lender will be repaid in the future. When a lender extends the facility, the borrower typically repays the loan with interest.
What is personal credit?
Simply put, personal credit is the type of credit facility extended to an individual. This includes both loans and credit cards. Approval of a personal credit facility to a large extent depends upon the data captured in your CIBIL report and the CIBIL score which is an outcome of complex algorithms based on the data.
Loans provide the option whereby you can borrow money towards purchase of say a house, or a car. There are various types of loans available to an individual, ranging from secured to unsecured loans. Let us take a look at some of these types.
Secured loans: This type of loan requires collateral to be provided against which the loan will be provided by the lender. Mortgages (or home loans), auto loans are the most availed of loans in this category. A security is created against the collateral offered, which is then hypotheticated to the lender until such time that the loan is repaid in full. Typically, the loan is paid off in monthly installments over a period of time.
Unsecured loans: A credit card would be a prime example of unsecured lending. Here, a lender extends credit to an individual without requesting for collateral. The amount due (that is the amount spent) on the credit card has to be repaid at the end of each billing cycle. If you choose to roll over your payment, the card issuer levies an interest charge on the outstanding amount, and hence it is prudent to make card payments in a timely manner. Therefore, it is very important to compare credit card before applying.
Credit cards are of various types ranging from charge cards and globally, store cards.
Another popular type of unsecured loan is a personal loan. Here, the lender extends credit for personal use, ranging from home renovation to going on your dream vacation.
Overdrafts constitute another type of loan, wherein basis a facility provided by your bank, you can withdraw money even once your account balance has gone down to zero. In this option, a limit is set depending on your account history and requirement.
Overdrafts come with an interest rate that can be fairly high and are best used for a short-term purpose.
Loans can also be obtained against valuables such as gold, or assets such as securities (or stocks). These loans are also to be repaid within a specific period of time and come with a rate of interest.
What is institutional credit?
In addition to loans for individuals, lenders also provide loans and overdraft facilities to companies, typically for business expansion. For example, a transport company may avail of a loan in order to increase their fleet of vehicles so that they can cater to a larger geographical reach.
The access to capital becomes critical for an organisation to function, across all aspects of the business.
Long-term loans are among the most popular type of loans made available by lenders to institutions. These serve varied purposes – from expansion of business, acquisition and fulfilling working capital requirements.
These loans are normally at a lower interest rate compared to short term loans and need to be repaid on a monthly basis. Lenders prefer to extend this type of credit to seasoned businesses.
Short-term loans, like the name suggests, need to be repaid in full at the end of the loan tenure. These are used to raise money for short term needs such as purchases to increase inventory.
Credit lines are made available to businesses when they require funds on a need-only basis. For example, working capital finance that a cargo company avails of, to buy a number of trucks.
Given the nature of the product however, these can come at fairly high interest rates and most institutions tend to use them to bridge short-term funding requirements.
The bottom line
Irrespective whether you are an individual looking at credit or an institution, you need to be credit healthy for a lender to extend you the facility. Therefore, it is imperative to maintain a clean or good repayment track record on any existing debt, and make timely payments.
If your credit health needs a boost, consider availing of the services of a credit health management company to understand where you stand, and how you can get stronger.