What is credit?

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Date16/06/2016

A word “credit” comes from Latin words “creditum, credere” which mean “believing, trust”. As one might guess, originally credit commitments were based on mutual trust. It seems that today an essence of relationships between creditor and debtor are changed, because believing and trust are insufficient. Other word which is often used as synonym of word “credit” is loan.

A word “credit” has several definitions. Credit may be money, product or service which is handed out on debt or, in other words, on hire payment. Credit may also be the way in which these things are handed out. Other definition says that credit or, in other words, lending means transference of money or material value to individual or legal person for certain consideration (money or surety) and for certain period of time. Another definition explains credit as transaction of compensation where creditor, basing on written contract, gives a money or a property to debtor. This transaction obliges the debtor to return a money or to repay a property with interests in certain time and order. Credit may also be a cash or non-cash, as well as assets that the creditor lends to the debtor.

Relationships between creditor and debtor are called credit commitments or loan commitments. Taking into account that the amount of money, which the debtor has to return to the creditor is also called debt, credit commitments are called indebtedness as well. As it appears, there are two sides in credit relations – the lender and the borrower. The lender lends the money, but the borrower borrows the money. Both of them benefit – the lender gets interests, but the borrower gets the money.

Lenders are called creditors. A word “creditor” comes from Latin word “credere” which means, as mentioned before, “to trust”. A word “debtor” comes from Latin word “debere” which means “to return the debt”. Basing on this explanation, the creditor trusts to the debtor, but the debtor is obligated to return the debt to the creditor.

Taking into account that the loan is borrowing of non-existent means, credit is believed to be a lending of non-existent money or money creating of blue skies. For this fantastic possibility lenders apply and borrowers pay an added value which is called interests.

Credit, basing on its spending target, has several types. There is mortgage loan which is meant for house purchase, student loan which is meant for studies in university, fast loans which are meant for solving of unplanned and urgent situations, car loan which is meant for car purchase, consumer credit which is means for different purposes, as well as leasing which is meant for purchase of different goods.