When short-term credit is offered, the amount involved is usually small and the credit period extends to no more than 1 year.
- Credit is given without any written agreement.
- Does not involve collateral security.
- Small amounts are involved.
- Repayment is to be made within one year.
- Usually offered by the retailers to their trustworthy customers.
Features of a credit card
- Magnetic tape
- Name of the card holder
- Card Number
- Expiry Date
- CCV number on the back side
Advantages of credit cards
- Convenient to use – Credit card can save time and is convenient compared to carrying cash with you. Credit cards are accepted all over the world, therefore it is very useful when travelling abroad. Minimized cash handling is also an advantage for the retailers as well.
- Record keeping – Credit card statements can help you track your expenses. Some cards even provide year-end summaries.
- Instant cash – Cash advances are quick and convenient, putting cash in your hand when you need it.
- An interest free short-term loan – No interest charged if amount paid before the due date
Disadvantages of credit cards
- It could tempt the card holder to spend beyond his means
- Many shops and stores still do not accept credit cards
- It is not available for everyone
- Possibility of credit card fraud
- Interest rates on cash advances are high, often compounded daily
- The value of credit offered is high. It is usually for the purchase of durable goods or property.
- Repayment period is more than 1 year.
- A written agreement is signed, and usually a collateral security is involved.
During the repayment period, ownership (title) of the item does not pass to the buyer. Upon the full settlement of the payment, the ownership passes to the buyer. It is suitable for durable goods with a good resale value.
A leaseback arrangement is useful when companies need to un-tie the cash invested in an asset for other investments, but the asset is still needed in order to operate. Leaseback deals can also provide the seller with additional tax deductions. The lessor benefits in that they will receive stable payments for a specified period of time.
Extended Credit or Deferred payment
It is suitable for items with low resale value.
In this case customer will become owner after signing the agreement.
Customer can sell the asset any time.
Loans are secured by a collateral security.
If customer defaults making payment the financier has the right to sue the customer.
Customers can buy goods and services up the given credit limit.
The amount used on the card has to be paid off at the end of the month.
Advantages of store cards
To the buyer
– Interest free purchase
– Extra services
To the seller
– Increased sales
– Customer loyalty
Disadvantages of store cards
To the buyer
– The customer tends to overspend as he/she does not have to pay
To the seller
– Bad debts