Chapter 4, Problem 2AA

To determine

To explain: The ways in which credit can be procured and also to protect young people from unfair credit trade practices.

Explanation of Solution

People may borrow money from various sources depending upon their credibility. The bank or other institutions will conduct a credit check to know the financial behavior of an individual. Sometimes credit rating agencies are hired to check creditability if the loan amount is large.

Banks or other financial institutions may provide various types of loans such as secured loans where the borrower needs to offer collateral security and unsecured loan where no collateral security is required to be kept with the bank. A higher interest rate is charged in the case of unsecured loans as compared to secured loans.

There are mainly two sources from where credit can be procured i.e. credit card/charge account and financial institutions. There involves a cost of borrowing which is the interest charged on the borrowed amount by the lending party or an institution. Credit can be availed only if the person has a good credit record. Bad credit records may make it difficult to get credit when actually required. Too many credit cards or charge accounts will lead to the bankruptcy of an individual.

To avoid uncontrollable circumstances one should make payments of credit charges on a timely basis. The government has taken various measures to protect consumers against unfair credit practices. A usury law is one of them which regulates the credit charges on the amount borrowed.