Speed up the progress to achieve financial goals

Credit is a form of lending. One party (lender) provides financial resources to another party (borrower), and the borrower repays the lender within an agreed period and generally with interest.

In essence, a loan has 3 parts:

LOAN AMOUNT — The lender allows the borrower to use needs- based capital, with a limit that the lender considers and provides in line with the borrower’s circumstances, such as their income, asset situation, and credit history (the borrower’s previous repayment of other debts, if any).

LOAN TERM — This is an agreement between the lender and the borrower regarding by when the borrower must repay the loan. Debt repayment schedule together with loan term: counted from the time the loan is received until the debt is paid off, the loan contract will also specify the repayment period and the amount to be paid each time.

INTEREST RATE — This depends on the borrower’s circumstances and the nature of the loan package.

Types of credit

Depending on the purpose and the borrower, lender, loan term, collateral, etc., there are many types of loans. For example, for credit for production and the circulation of goods, companies borrow money for business purposes such as building new factories, buying inventory, and paying employees’ salaries. Since this book focuses on learning about personal finance and consumer credit, we only discuss the topics of personal credit.

"CONSUMER CREDIT IS THE DEBT TAKEN BY AN INDIVIDUAL TO BUY GOODS AND SERVICES, SUCH AS HOUSES, CARS, AND FURNITURE."

In order to serve individual consumption needs, consumer credit can be divided into two segments based on collateral, namely:

Secured consumer credit (secured loan):

Borrowers mortgage their own property to get a loan; the value of the collateral is always larger than the loan value to avoid risk to the lender.

Unsecured consumer credit (unsecured loan):

Borrowers do not need to mortgage any property to get a loan, instead they rely on an unsecured loan (understood as a “mortgage of trust”). Customers must ensure that they have a healthy financial position and have a good reputation with the lender.

Since these two types of credit present a big difference in risk for the lender, the characteristics of these two types of credit are also quite different:

LOAN AMOUNT

Since there is no collateral (the lender will suffer a 100% loss if the borrower becomes insolvent or default), unsecured loans are only approved for much smaller amounts than a secured loan.

LOAN TERM

Due to the higher risk, the loan term of an unsecured loan (usually less than 3 years) is also much shorter than that of a secured loan (from 15 - 20 years).

INTEREST RATE

Unsecured loans have a higher interest rate than secured loans. The higher interest rate of unsecured loan packages is to compensate for the costs incurred to manage the loan - costs such as debt collection fees and service charges. The lenderl increases or decreases the lending interest rate according to the borrower’s income and credit history to balance risk and return factors.

GOOD POINTS AND BAD POINTS OF UNSECURED LOANS AND SECURED LOANS IN CONSUMER CREDIT:

There are two more important factors to consider when comparing secured and unsecured loan packages. They are:

* BORROWER

* BORROWING PURPOSE

Unsecured loan package

An unsecured loan package is for students or those who have just graduated, unskilled workers, or young people who have just graduated from school, and not accumulated many assets as it doesn’t require collateral. The main purpose of borrowing is to buy moderate value items such as motorbikes, computers, phones, or to assist in urgent matters that need a little cash. The obvious advantage of unsecured loans is that they can be secured quickly. This helps young people or young families who don’t have a stable income or haven’t saved much, offering them a quick solution with a reasonable and legal interest rate.

"UNSECURED CONSUMER LOANS PRESENT MANY RISKS FORFINANCIALINSTITUTIONS, AND THESE RISKS DEPEND ON THE CREDITWORTHINESS OF THE BORROWER. ”

Since most unsecured borrowers have a low income, if there are no unsecured loan packages from reputable and professional credit institutions (banks or financial companies), it is easy for people to fall into “black credit”, falling victim to much higher interest rates and risks to themselves and their families. In terms of social security, unsecured loan packages also contribute to a reduced risk of crime due to debt collection from black credit.

However, because the interest rate of this loan package is quite high compared to the bank savings deposit or customers' income growth, the borrower needs to have a specific repayment plan in place before borrowing and must absolutely comply with the repayment schedule to avoid very high penalty interest rates. They also need to avoid developing a bad credit history in the banking system, which would make it extremely difficult to get a loan elsewhere.

Secured loan package

In contrast to an unsecured loan package, this loan package has a much lower interest rate and longer loan term thanks to the use of collateral to secure the repayment obligation to the lender. This loan package is often provided for large- value expenses, such as buying a house, a car, land, or building property.

A secured loan package is suitable for customers who have a relatively stable income and have certain accumulated assets that the bank evaluates before making a decision. In addition, due to the large size of the loan, the repayment time is also suitable for stable or high-income people. Generally speaking, borrowers with a good credit score/ credit history, stable income, and the ability to repay on time are considered for high-value and low-rate loans. We will dive into the subject of credit scores at the end of this chapter.

As a loan package for individuals to buy large- value assets (mainly real estate), it is a good tool for accumulating assets as well as practicing investment and savings habits (due to the periodical principal and interest repayment, meaning there is no chance of unnecessary spending).

LEARNING HOW TO USE FINANCIAL LEVERAGE VIA CREDIT TO AVOID BUYING HIGH-RISK ASSETS PROVIDES MORE OPPORTUNITIES TO INCREASE ASSET VALUE IN THE FUTURE.