Credit and Collateral

Credit is the trust someone bestows on another person to offer resources where the person who receives the resource does not pay back immediately. Instead, he arranges to either pay the borrowed resource at a later date or pay up with any other resources of equal value. Resources provided maybe financial, like a loan. The resources might also be good or services for instance, consumer credit. Credit includes any type of overdue payment. Credit is given by a person who is termed as a ‘Creditor’ commonly known as a lender. The person who is on the receiving end is referred as ‘Debtor’ or in common terms, a borrower.

In the modern societies, credits are usually denominated by a unit of account. In contrast to money, credit itself cannot operate as a unit of account. In commercial trade, the word ‘trade credit’ is used to refer to the authorization for belated payments for purchased goods. Sometimes, credit is not approved to a person who is devoid of financial instability.

In lending agreements, collateral is what a borrower deposits a property to the lender to secure the settlement of the borrowed resource. The collateral acts as a fortification for a lender against borrowers default, that is, in case if a borrower is unable to pay the borrowed resource or is unable to pay the interest under the terms of loan requirements. If in case, a borrower becomes insolvent by law and is not able to pay back the borrowed sum, the property or the object that he has pledged to the lender is considered to be surrendered and the lender becomes the owner of the collateral.

For instance, in a mortgage loan transaction, the real estate property obtained by the help of the loan acts as collateral. If the buyer fails to pay the loan under the mortgage loan agreement, the possession of the property is reassigned to the bank. The banks all around the globe make use of a legal procedure what is called as a foreclosure to procure the property from the borrower, who fails to pay up the mortgage loan requirement.