Agribusiness Library

LESSON L060020: EVALUATING SOURCES OF CREDIT

Objectives1. Compare and contrast the sources of personal or business loans.

2. Describe the function of credit cards, and investigate the advantages and disadvantages of credit card use.

3. Describe charge accounts.

Terms•Average daily balance

•Banks

•Charge account

•Credit card

•Credit unions

•Installment plan

•Revolving credit account

When searching for a loan, businesses and individuals have choices.

Banks and credit unions can provide short-, intermediate-, and long-term loans.

A. Banks are entities that are in the business of making a profit. They provide loans to other

businesses and individuals and charge interest on these services to make a profit.

This does not mean that banks do not care about their customers.

Without sound financial decisions and investments, banks would quickly be out of business.

B. Credit unions are non-profit organizations that are owned by the customers and operate to provide the best possible services and products to their members. Credit unions are managed by a board of volunteers that

make decisions that will best benefit the members. Because they are typically smaller than banks, credit

unions may not offer all of the same products or services. Since credit unions are owned by the customers,

businesses are not usually members of credit unions; they find banks better suited to their needs.

A credit card is a plastic card with owner information that is used to conduct a credit transaction.

A. Many department stores and financial institutions offer credit cards.

B. Most credit cards use a revolving credit account; the cardholder can pay the full amount or a minimum monthly payment.

C. If minimum payment is made, finance charges begin on the unpaid balance. Finance charges on credit cards are

typically high. As a result, the more unpaid balance

that is left each month, the more interest that will be charged on that amount.

D. The cardholder can continue using the account until the credit limit is reached.

E. Finance charges are usually charged on the average daily balance, which is the balance carried forward plus any new purchases. Failure to make a monthly payment

may allow the credit card company to increase the finance charges, resulting in even more interest and a higher amount to pay the following month.

A charge account is extended by retailers to those who purchase products from them.

Charge accounts make purchasing the product more convenient for the consumer and are typically used by customers who commonly purchase many items daily or weekly at the same business.

A. For example, instead of paying for fuel at each visit, the gas station keeps an account of how much is owed by the customer. Typically, a monthly bill is mailed to the

customer for payment. To make it more convenient for customers,

interest is usually delayed for a certain period of time.

After this period has passed, the business may charge interest on any unpaid portion of the account.

Because most businesses are not able to survive long with large amounts of money waiting to be repaid, this type of credit may carry extremely high interest rates for unpaid balances.

B. Charge accounts can sometimes be repaid using installment plans. An installment plan would allow

a customer to make a set payment each month on the account rather than paying the amount in full.

Even with an installment plan, some businesses may charge interest on the unpaid amount.

REVIEW•What are the sources of personal or business loans, and how are banks and credit unions different?

•How are credit cards used?

•What is a charge account?