Chapter 4.3, Problem 1R

To determine

Significance of credit bureau, credit check, credit rating, collateral, secured loans and unsecured loans.

Explanation of Solution

Following are the significance of:

1. Credit bureau
• It provides information to creditors, which helps to take lending decision.
• It provides data to banks and credit card issuers as their business depends on the credit bureau.
2. Credit check
• It helps to understand financial behavior of creditor.
• It provides information onpayment history, credit worthiness, and financial background.
3. Credit rating
• It helps to determine whether the loan should be given or not.
• It provides individual credit rating on a numerical scale usually between 1-10.
4. Collateral
• It provides security to lender.
• It reduces the number of loan defaulters.
5. Secured loans
• It helps to get a larger amount of loan easily.
• Secured loans makes the rate of interest lower.
6. Unsecured loans
• It is a less risky option from borrower point of view.
• These loans are flexible.

Economics Concept Introduction

• The credit bureau is an agency that gathers information about individual credit information.
• Credit rating implies an individual’s financial ability to repay the loan.
• Credit check is a situation where a company looks for a credit report to understand financial behavior of an individual.
• Collateral refers to an asset that lenders accept as a security to the loan.
• Secured loans refers to when lender keeps asset as a collateral to the loan.
• Unsecured loans is a loan which is not protected by any collateral or guarantor.