Customer Credit

Credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time.

Reasons for giving Credit

  1. To gain competitive edge.
  2. To earn additional money.
  3. To sell a very expensive items.
  4. When the product sales is on decline.

Matters discussed in agreement

Short Term Credit

Informal Credit

Credit Cards

  • A plastic card with a magnetic tape or with a micro chip on it issued by commercial banks to their credit worthy customers on request.
  • These can be used for making payment at selected retailers or for drawing cash from selected ATMs upto a certain limit.
  • Features:
    1. Plastic Card.
    2. Magnetic tape.
    3. Name of card holder.
    4. Card number.
    5. Validity date.

Over Draft

Long Term Credit


Hire Purchase

Sale and Lease back

Extended Credit/Deferred payment

Comparison between Bank Loan and Leasing

  Bank Loan Leasing
1. Cheaper source of finance Expensive source of finance
2. Collateral security is involved Collateral security is not involved
3. Good is actually sold Good remains in the owner ship of the seller
4. In case of payment defaults bank can not repossess the good I case of payment defaults seller can repossess the good
5. Suitable for goods with no second hand value Suitable for goods with good second hand value

Advantages and Disadvantages of Customer Credit

Advantages Disadvantages
To the Economy
1. Encourages the sale of expensive goods. 1. Can cause general increase in price level.
To the Seller
1. Increases turnover and thus profit. 1. If seller finances the installment-buying then capital requirement is increased.
2. Enables stocks to be cleared. So less risk of stock going out-of-date. 2. If buyer defaults in making payment then seller has to re possess the goods which may be damaged.
3. Can earn interest if he is also financing. 3. Administrative expense to record installments.
To the Buyer
1. Raises the standard of living. Has to pay extra interest.
2. It is a way of forced saving. 2. Encourages people to spend rashly.