Explain the different terms of credit.

(i) Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

(ii) In addition, lenders may demand collateral (security) against loans.

(iii) Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.

(iv) If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.

(v) Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing.

(vi) Interest rate, collateral and documentation requirement, and the mode of repayment together comprise the terms of credit.

(vii) 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.