The origin of the term “credit” has several interpretations. Some experts consider it to be a derivative of Latin credit (translated as “he believes”), others, from creditum (loan, debt). In fact, a loan is a movement of loan capital, or a loan in cash or in commodity form. The concept and practice of lending existed several millennia ago in kind and in cash. Both of these forms of loans developed in parallel, acquiring their scale and significance.
Essence of credit
Let us briefly consider the essence, and functions, and principles of credit, what they represent in practice. A stable and invariable concept of the essence of credit, which denotes economic relations between lenders and borrowers on the issue of the return movement of monetary value or value in commodity form.
The subjects in credit relations are legal entities or competent citizens: lenders - persons who transfer value for temporary use, and borrowers receive a loan and are obliged to repay it within the agreed period. At the current level of organization of commodity-money relations, a subject can simultaneously perform the functions of a creditor and a borrower, for example, a bank. The object of a credit transaction is the value of money and commodity loans transferred to the borrower by the lender with a subsequent return.
Loan functions
There are two main functions of lending in modern conditions: redistribution and the function of replacing cash transactions with non-cash loans. With the help of the redistribution function, monetary and commodity assets belonging to one economic entity are transferred for use to another economic entity for a certain time subject to repayment, urgency and payment.
The replacement function is to create means of payment on the basis of credit, the use of which has the effect of saving distribution costs. The aforementioned function appeared due to the specific organization of modern cash flows with the predominance of non-cash forms of settlements made in them. By storing money in banks, the client thus enters into credit relations with the latter and creates the possibility of conducting credit operations in the form of bank records, instead of using cash.
Loan principles
In the process of credit relations, the basic principles of credit are applied, these include urgency and repayment, material security, target nature, payment.
• Repayment of a loan implies a timely repayment of a loan after completion of its use.
• The urgency of the loan determines the terms in which the loan must be repaid by the borrower, they are recorded in the loan agreement or other equivalent document. Due to violation by the borrower of the specified terms, the lender has the right to apply economic sanctions to him.
• Loan repayment is the profit received from using a loan and distributed between the lender and the borrower in the form of a loan interest. Through this principle, the borrower not only repays the loan received at the bank, but also pays for the right to use it.
• Loan security - a loan is secured or financially guaranteed. This ensures the protection of the interests of the lender in case of violation by the borrower of the loan obligations.
• Target nature of the loan - provides for the use of credit funds for specific purposes defined by the loan agreement.
In addition to these basic, there are other principles of credit. So the differentiated nature provides for a different approach of credit organizations to potential borrowers of different categories.
Of course, the borrower can take and use credit funds without knowing the fundamental principles of the loan and the rules of operation of this financial instrument. However, the lack of information can lead to unforeseen expenses and various misunderstandings. To confidently and safely take advantage of the economic benefits of lending, you must have basic information. Having learned the principles of credit, you will be able to calculate your own capabilities in advance and enter into legal relations with the bank, without incurring huge losses and feeling confident in the future.