On credit

economic-dictionary

The credit form is a payment method existing in the economy in which this is made in a period of time after the time of purchase or acquisition and with previously agreed interests.

Satisfying a payment commitment under the credit mode means that an economic transaction is not instantaneous. That is to say, there is a delay or waiting for the realization of the own payment under a previous convenience between the participants.

It is common for late payment of an acquired good or service to be made through installments or in a single payment at the end of a specified period (expiration date). In both cases, the existence of interests or conditions agreed between the creditor and the debtor is frequent.

In that sense, the fact of paying on credit goes hand in hand with an increase in the price taking into account the interest to be assumed by the acquirer or buyer.

Thus, it becomes possible to have a product available in the present in exchange for future income or profits.

Characteristics of credit payments

Compared to other payment methods, payment by means of credit involves a series of main features:

  • It is usually the predominant modality in purchases or transactions of large amounts, either for security or for lack of availability of said amounts at the time of the operation
  • The participation of banks and credit entities is common to carry out transactions
  • This form of payment energizes the economy and stimulates trade. It also discourages savings by allowing families and companies to purchase products before having the full purchase amount.
  • Sometimes it is essential for the purchase the disbursement of an initial part of the total amount by way of entry. A clear example is in the housing market where payment is made on credit through a mortgage loan with a mandatory initial entry.

Given the frequency of credit payments, multiple products have been developed in the economic day-to-day, such as credit cards or promissory notes.

Credit payment example

Let's imagine that we have to buy a table. It is Friday and we will receive our salary on Monday. However, we need the table to study Tuesday's exam because the previous one was broken. Paying on credit allows us (for example, through a credit card) to have the table before having our salary.

Although paying on credit has interesting advantages, we must always take into account the commissions and the interest rate. Buying on credit (especially through credit cards) can be very expensive and it is advisable to use it only when it pays us financially to do so.

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