CHAPTER VI: CLASSIFICATION OF CREDIT AND THEIR RESOURCES

A. Personal Credit
- Those credits obtained for ones use.
Three Types of Personal Credit:
1. Service Credits those obtained from doctors, lawyers, dentists, and other professionals.
2. Retail or Consumers Credits goods obtained mostly on retail.
Three categories:
a. Regular charge account you are charged the goods you obtained on credit and you
usually pay within 15-20 days after you are billed.
b. Revolving charge the credit is not paid in full within this period but is divided into
amounts which are to be paid in longer periods such as semi-monthly installment.
c. Installment plan resembles the revolving charge in that the debt is paid off over a
certain period of time. The creditor requires, most of the time, a downpayment.
3. Personal Loan Credits cash or money is given as a credit instead of goods and services.
Personal loans are usually granted for the purchase of expensive consumer items.

Criteria for Granting Personal Credit

*Employment and personal resources best criteria for granting personal credit.
* Wealth and accumulated resources primary factors in determining the basis of personal credit.
* A persons wealth, which may be in the form of stocks, bonds, profits from businesses or real estate,
is an indicator of his capital position and his ability to pay.
* Wages, salary, and regular remunerations indicates a persons capacity as well as his ability to repay
his credit.
* Other factors, which are equally taken into consideration are the operating expenses incurred by the
borrower, the additional sources of income of the family, the size of the family, and the paying habits of the
borrower.
*Occupation is also important because some kinds of occupation are better risks than others.

Lending Act
Truth in Lending Act act designed to protect consumers against unfair billing practices of people
who extend credit to a purchaser of goods on installment basis.
The law required creditors to furnish each customer the following information before transaction is
consummated:
1. The cash price of propoerty to be serviced or acquired.
2. The downpayment, if any, or the trade-in price.
3. The difference between the amounts under 1 and 2.
4. The charges, individually itemized, which are paid or to be paid in connection with the transaction
and which are not incidental to the extension of credit.
5. The total amount to be financed.
6. The finance charged expressed in terms of pesos.
7. The percentage that the finance charge bears to the total amount to be financed which is
expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
B. Commercial or Mercantile Credit
Commercial or Mercantile Credit are credits extended by one businessman to another businessman. Manufacturers
extend a mercantile credit to wholesaler, and wholesaler to retailers. These transaction are called merchandise credits
or trade credits because they are form of goods. The fact that the values received are in the form of goods differentiates
them from cash credits. A commercial credit is generally an unsecured short-term type of credit. A commercial or
mercantile credit has for its purpose the facilitation of movements of goods through the different stages of production
and distribution.

C. Bank Credit or Bank Loans

Bank Credit or Bank Loans are granted by banks to businessmen to finance their short-term credit needs. Commercial
banks usually grant these loans to finance current business operations, goods in process, temporary working capital
needs and storage of inventories, or purchase inventories.

D. Export and Import Credit

Export credit are obtained to finance the selling of goods outside the country. Import credit are also obtained to finance
the buying goods from other countries. These are obtained from the banks. A bank credit is introduced into international
trade finance through the use of letters of credit and drafts.

Chart I: Financing an Export Chart II: Financing an Import

SHIPPING CO.

IMPORTER EXPORTER IMPORTER EXPORTER

IMPORTERS EXPORTERS LOCAL FOREIGN

BANK BANK BANK BANK

*Financing an Export
1. Request importer to furnish him with Bankers L/C
FINANCIAL
2. Open L/C
INTERMEDIARY
3. Sends Bankers L/C
4. Notifies Exporter of L/C
5. Ship goods
6. Draws drafts against Importers Bank
7. Pays Exporter
8. Pays Bank

*Financing an Import
1. Application for L/C
2. L/C sent to Foreign Bank
3. Notifies Exporter of L/C
4. GOODS SHIPPED Under Bill of Lading
5. Draws a draft thru his Bank
6. Sends draft for acceptance
 7. Documents attached and draft returned
8. Pays Exporter
Documents released under trust receipt
9. Sells Accepted draft to financial intermediary
10. Pays draft when due
11. Pays Local Bank

E. Investment Credit
When a business prefers to acquire funds by entering into a long-term borrowing arrangement, it is said to be
using investment credit. Frequently, the need for investment credit is to provide funds needed by the business to
acquire costly productive and marketing facilities

F. Agriculture Credit
Agriculture Credits are credits given to farmers for the development improvement and cultivation of their lands.
They may be in the form of a:
1. Crop Loan. This loan is given to farmers for the purpose of financing the production of a particular crop like rice,
corn, peanuts, soybeans, etc. Here, the farmer cannot sell his crops unless he notifies his creditor. Example:
Masagana 99 and Palayan Loans, which were given by rural banks.
2. Livestock Loan. This loan is obtained to finance the raising of pig, chickens, ducks, goats and other animal for
breeding purposes.
3. Agriculture Time Loan. This loan is used to finance the development and improvement of a farmland. Collaterals
are usually land and farm equipment owned by the borrower
4. Commodity Loan. This loan is obtained to finance the selling and distribution of farm crop, which are kept in a
warehouse and evidenced by warehouse receipts.
The Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP) are institutions, which are the
principal supporters of agricultural loans in the Philippines.

G. Industrial Credit
- Industrial Credits are loans granted to industries to finance the acquisition of equipments and machineries to finance
the construction of a plant or factory and to some extent to finance the purchase of raw materials for manufacturing
capital goods or goods for consumption purposes.

H. Real Estate Credit

- Real Estate credits are loans to finance the purchase and improvement of real properties like a house or a building.

I. Government or Public Credit

- Government or Public Credit are credits obtained from any of the government institutions or their instrumentalities.
The debtor may be the national, provincial or local government.

J. Secured and Unsecured Credits

- Secured credits are those credits, which are covered by properties of value called collaterals to guarantee loans.
- An unsecured credit, on the other hand, is one where the borrower has merited the full trust and confidence of the
creditor.

K. Short-term, Medium-term, and Long-term Loans

- Short-term loans are those loans payable within a year. Examples of these are the commercial bank loans, retail
credits, such as the regular charge accounts, and the revolving charge.
- Medium-term loans are payable from one year to five years. Sometimes it is called an intermediate term loan.
Examples of these are car loans and installment plans on appliances.
 - Long-term loans are loans payable beyond five years and usually up to 15 to 20 years. Most of the real estate loans
fall under this category. Investment loans are mostly long-term loans.

L. Direct Loans, Discount Loans, and Credit Lines

- Direct loans are loans whose interest payments are made at the time the loan matures. Here, the borrower gets the
entire amount applied for, and upon maturity of the loan, he plays the principal plus the interest.
- Discount loans are those loans where interest payments are deducted at the time the loans are granted.
- A Credit Line is an agreement between the debtor and the creditor wherein the debtor is allowed to obtain funds
from the creditor up to a certain amount.
- The regular credit line is one in which the debtor is allowed to draw funds from the creditor up to an amount agreed
upon and the funds drawn when paid can be borrowed again.
- Under a maximum loan commitment, the borrower can obtain funds from the creditor up to a certain amount agreed
upon.
- An overdraft line is also a credit line in which the bank allows its depositors to draw from the bank beyond their
actual deposits.

Source of Credit.
Banks - a financial establishment that invests money deposited by customers, pays it out when required, makes loans at
interest, and exchanges currency.

Types of Bank:
1. Commercial Banks - are banks that offers services to the general public and to companies.
2. Thrift Banks these banks have three types.
Savings and Mortgage bankThese banks borrows money/property from people as securities.
Stock Savings and Loan Association (S&L)- specializes in accepting different types of loans (E.g. Savings,
deposits, mortgage, etc.)
Private Development Bank Provides development loansthat allows you to pay for courses and training that
help with your career or help get you into work.
3. Rural Banks Banks that caters farmers and small businesses in rural areas, especially on agricultural
development.

Other Sources of Credit:

1. Retail Stores commonly known as sari-sari store(s). They give personal consumer loans in their trusted
customers in an open book account basis.
2. Credit Loans Provides loans to union members with the lowest possible interest.
3. Individual Money Lenders informally called as loan sharks. These people have tons of excess funds that they
can lend loan(s) to people who in need. Most money lenders here in the Philippines are Arabs, commonly
referred as Bumbay.
4. Insurance Companies They provide insurances to people.
Insurance - a practice or arrangement by which a company or government agency provides a guarantee of
compensation for specified loss, damage, illness, or death in return for payment of a premium.
5. Sales Finance Company The biggest source of credit. These are a person or entity engaged in the business of
purchasing retail installment contracts, obligations or credit agreements made between other parties. They also
leases vehicles, machines and/or equipments.
 University of Caloocan City
Camarin Campus
Tulip Street Area C., Camarin, Caloocan City

CHAPTER VI:
CLASSIFICATION OF CREDIT
AND THEIR RESOURCES

Passed by:
Cortez, Rema Theresa C.
Pamplina, Ma. Patricia N.
Banguis Jr., Lorenzo C.
Arellano, Philip Adrian Y.
BSAT 3-D

Passed to:
Prof. Joeanly Fines