What are the terms of credit?
- Every loan agreement specifies an interest rate which the borrower must pay to the lender along with repayment of the principal.
- In addition, lender may demand collateral, i.e., an asset that the borrower owns and uses this as a guarantee until the loan is repaid.
- If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.
- Terms of credit comprise interest rate, collateral and documentation requirement, and the mode of repayment.
*The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.