Building Credit

A creditor is that person or institution that provides credit by giving another the chance to borrow money that will be repaid in the future. Alternatively, a business who provides supplies or services to a customer without immediate demand of payment is also considered a creditor. This is based on the fact that a client owes the entity money for services or products already enjoyed.

There are two fundamental types of creditors, and they can be classified as either personal or real. Personal creditors are people who loan money to family and friends. While Real creditors such as microfinance banks or any other financial institutions have a contractual agreement with the borrower, this arrangement gives the lender the right to claim any of the debtor’s genuine assets if they cannot pay back the loan.

Different Forms of Creditors

In general terms, a creditor is synonymous to a supplier. A creditor could be a person, organisation or any other entity that sells products or services. This means that all wholesalers and retailers could be creditors because they are into selling their products or services.

Another example of a creditor relationship is if you take out a loan to buy your house. Then the bank who holds your mortgage is the creditor. As such, if a person or entity has given out money as a form of a loan, then they are a creditor.

Usually, anyone could be a creditor depending on the kind of transaction that triggered the lender and borrower relationship. Each creditor has a stipulated agreement with their borrowers about the terms and conditions of the loan contract.

How Do Creditors Make Money

With the prevalence of creditors nowadays, you may wonder how lending companies make money. Creditors make money by charging interest on the loans they offer their clients. For example, if a borrower receives a loan for the sum of N5,000 with 10% interest rate, the lender makes money due to interest on the loan. In return, the creditor faces a risk that the borrower may not be able to repay the loan. To reduce risk, most creditors factor their interest rates or fees into the borrower’s credit score and past credit history. As a result, being a responsible borrower is essential and could save you a deal of trouble getting a loan, particularly if you are taking out a jumbo loan. 

Borrowers with quality credit scores are considered low-risk to potential creditors, and as a result, these borrowers are rewarded with low-interest rates. In contrast, creditors consider borrowers with weak credit scores as high risk, and to mitigate the risk, they are charged with higher interest rates. 

What Happens When The Borrower Defaults?

The creditors are often posed with the challenge of repayment when granting loans. If a borrower does not make repayments as at when due, the creditor has a few varieties of options. Personal creditors who cannot recover a debt may be able to claim it as gain on their income tax return. This incentive can only be effected after they must have attempted to recover the debt. Creditors such as banks can take over collateral used to secure the loan such as homes and cars. They also have the option of taking loan defaulters to court over unsecured debts or engage a third-party to buy or recover the debts on their behalf. 

Conclusion

However, if a borrower declares himself bankrupt, the court duly notifies the creditor of the proceedings. Sometimes, the borrower’s assets are sold to recover the debts and paid in order of their priority. Unsecured loans such as online loans are given the least priority, giving those creditors the smallest chance of recovering their funds from borrowers during bankruptcy proceedings.

In international trade, the relationship between the importer and exporter can result in a conflict of interest. This is because both parties are prone to risks of engaging in overseas transactions. To avoid business scams, the two parties need to come to a compromise by agreeing on one method of payment.

What is Letter Of Credit

A letter of credit is a commercial instrument designed to facilitate the movement of goods by providing protection and finance to the buyer and seller. You should not confuse this with the Letter of Guarantee.

Parties To A Letter Of Credit

There are five major parties to a documentary letter of credit, and they are as follows;

• The Importer or Applicant – This is the initiator of the letter of credit. He pays the Naira cover when the loan is due, including bank charges. To do this, the bank must rank such applicant as creditworthy, and he also provides collateral before he gets the credit.
• Issuing Bank – The Issuing Bank is the bank that opens a credit (i.e. importers bank). The issuing bank advises details to the correspondent bank. The bank guarantees payment to the exporter and thus is primarily liable on credit.
• Advising Bank – The advising Bank receives details of the credit from the issuing Bank and issues the same information to the beneficiary. The exporter who acts according to the details of the instructions will only be paid on presentation of the substantiating document. The advising bank is also the receiving bank.
• Confirming bank – the confirming bank can sometimes be the advising bank. The confirming banks are the banks that confirm the letter of credit in issue by the issuing bank
• Exporter or Beneficiary – The exporter is the beneficiary of the documentary letter of credit and is responsible for keeping to the terms and conditions of the credit. If the documents are in order, he is sure of the payment immediately for sight bill.

How Letters of Credit Work

A letter of credit is a document you generate from a bank that guarantees payment transactions. There are various kinds of letters of credit, and they provide the security needed for carrying out operations.

• Seller protection: If a buyer is unable to pay a seller, the issuing bank that raised and issued a letter of credit will pay the seller. The seller must meet all requirements in the letter of credit. This provides security when the buyer and seller are in different countries.
• Buyer protection: In the case of buyers. If you pay someone to provide a product or service and they are unable to deliver, you might be able to receive payment using an anchor letter of credit. The amount can be a fine to the company that was unable to deliver, and it’s equal to a refund. You can pay someone else to provide the product or service needed with the money you received

Information Provided By an Applicant

The applicant for the letter of credit has to complete a form. The information needed by an applicant includes the following;

1. State whether the credit is to be revocable or irrevocable
2. The name and address of the ex[porter or beneficiary
3. The amount of credit and the currency involved.
4. The maturity date of the credit
5. The last shipment date
6. How the credit is to be advised 
7. Description of the goods or services
8. The documents which will be required to be produced

Conclusion 

The Letter of Credit is a kind of credit that a person who indulges in international trade gets. It is a conditional guarantee of payment by the bank given that the exporter fulfils certain conditions. The underlying conditions are certain before payment can be effected. Before you enter into a business transaction with an overseas customer, it is better to include it into the conditions. This puts both the buyer and seller at ease and secures their exposure to each other.

Introduction

The art of lending or financing is a concept that has been around since the beginning of civilization itself. Thousands of years ago, farmers used their grains and seeds to borrow capital and also used livestock as a repayment option.

Ever since then, the lending system advanced to become the complex financial structures we know now.

What is Lending?

It merely means giving out money or property to another individual with the expectation that it will be repaid in the future. In a financial context, lending includes different kinds of commercial loans. 

Who are Lenders?

Lenders are financial organizations or institutions who are in the business of giving out loans. While individuals can also be called lenders, their motive for lending may differ from that of a financial institution who are in it to make a profit. Overall, they’re also called creditors.

When your family member lends you money, they may not be necessarily looking to make a gain for themselves; they probably want to bail you out of a financial situation. But that cannot be said of financial institutions such as banks and credit unions.

These institutions expect not only to be reimbursed. They also expect to be paid with interest; which is the reason for this article.

Different Types of Lenders

Traditionally, lenders are often referred to as banks, cooperative societies, credit unions and any other form of financial institutions. In reality, lenders have expanded beyond the scope of banks and associations. 

They are referred to as less traditional sources of funds for personal or small business loans – and they include

• Family and Friends – they are sources of funds that can bail you out of emergencies from someone you already know. This could be any member of your family or friends. However, no matter how close you are, draw up a loan agreement when taking the loan.
• You can also borrow money from yourself. This is common to lending into your own business. All it takes is the required discipline to treat yourself as a separate entity from your business. This will encourage you to make your repayments when they fall due.
• Peer to peer lenders – these are sources of finance you earn by association. Like club or association lenders. They are not established to grant members loan. However, they could lend a hand to a member in need.
• Crowdfunding – it involves raising a small amount of cash from many people. The best thing about crowdfunding is it doesn’t require an interest payment 

How do lenders make money?

It’s straightforward. Mortgage brokers, banks and credit unions make their profit from the interest they charge on your loan offer. This is referred to as the cost of a loan. As lending money can be a risky business, these lenders charge an interest rate depending on the risk involved. The higher the risk of not paying, the higher their interest rates.

Think about it – While lenders may seem like bad guys, they are vital to the development of the economy. For example, When You go to request a bank to request a rent loan, the bank takes funds from their depositor (savings and money market accounts) and offers you the credit; at a higher rate 

The loan enables you to pay your rent. The landlord now has more money to pay his staff. The employees of the landlord now have money to circulate to businesses. Other businesses, in turn, grow the economy.

Introduction

What is a Credit Score in Nigeria? A credit score is a unique credit rating system that shows lenders how risky it is to lend to an individual. Developed by the Fair Isaac Corporation (FIRC), an American data and analytics company, it helps individuals to know what their credit status is and lenders to make quick and informed decisions. Your credit score is dependent on the information on your credit report, which is your credit history over a period.

Credit score factors shape the credit score and the lower your score, the riskier it is for lenders. A credit score is basically a 3-digit number that has the minimum being 300 and the maximum, 850. In calculating the credit score, the following are the standard measures.
Excellent 800-above, Very Good 750-799, Good 700-749, Fair 650-699, Poor 600-649, Very Bad 300-599.

How to Calculate Credit Score

The following factors form the basis for calculating your credit score

1. Payment History: This refers to the degree of compliance to agreed payment terms. Ideally, it should be at 35% however, factors such as bankruptcies, late payments and default in payment affects the outcome.
2. Amount Owed: This takes into review the amount owed in your account, the number of accounts with balance and the available credit. This rate is over 30%
3. The pursuit of New Credit: If you have recently opened a new credit account, the score will weigh against the rest of your credit history. The rate is over 10%
4. Length of Credit History: You can achieve a good credit score with short credit history if the rest of the report shows your responsibility with credit. However, an extended credit history increases your credit score. The rate is over 15%.
5. Credit Mix: Installment loans, credit cards, and personal lines of credit can slightly increase your credit score. The rate is over 10%.

 How to Access your Credit Score in Nigeria

Credit score plays a vital role in one’s financial life. It is a three-digit summary of your credit report, which determines your creditworthiness by outlining your credit activities for your entire history as a borrower. 

 If you have ever considered getting a loan, your credit score is what lending institutions evaluate to determine how safe or risky you are as a potential customer. Your credit score is dependent on your account activity. 

To access your credit score, you need your credit report because your ratings are dependent on information in your reports. A credit report includes details about your past and existing credit agreements. These include credit, loans, mortgages, debt collections, cards, whether you’ve made on-time payment for your bills and the lists of businesses that have most recently viewed your credit history. These credit checks are inquiries.

How do I get access to a credit report in Nigeria?

As a Nigerian, you can get one free Credit report annually from any Credit Bureau registered in Nigeria. Here are the ways to get access to your free credit report:

1. Apply on the CRC Credit Bureau website. CRC Credit Bureau also has a USSD code (*565*8#) you can dial to check Credit reports instantly. You’d have to be an MTN subscriber to use their USSD option.

2. You can also access a free credit report from the Credit Registry’s website. The Credit Registry offers a free report on an annual basis.

3. Get a free credit report from Carbon (formerly Pay later). Carbo also offers free credit reports to Nigerians. 

 Conclusion

Knowing your credit score not only helps you take control of your finances, but it also makes you better prepared for loan application. The credit score calculator is easily accessible, and you can purchase for N400 on the Credit Bureau website. We recommend that you check your credit score at least once a month.

Related Post: The Credit Bureau in Nigeria: Facts and Figures

A loan is simply the lending of cash by a person or organisation (a lender) to another entity (a borrower). Most cases, the lender expects the borrower to pay back the money in the future with Interest. In this writeup, we focus on the loans financial organisations such as banks provide.

Why People Borrow Money

There are so many reasons why individuals borrow money. But at the core of every motive, lies a financial obligation that needs attending to. By taking a loan from a bank or any of the platforms where you can get an instant online loan in Nigeria, you can meet these obligations and focus on other areas of your life.
As important and helpful as getting the right loan can be, it is equally important to understand what the loan offer entails.

5 Things to consider before accepting the loan

Whether this is your first time applying for a bank loan or it’s a routine, there are five factors to always look out for. These help you determine the right kind of a lender; you can trust and work with you on a long term basis.

1. Credibility

When finding a lender for your loan, take a close look at the lender’s reputation. A quick google search to see what comes up under their name is a good start. Also, Look out for articles written about them and customer reviews to have an idea of who you’re working with.

2. The rate of Interest

An interest rate is an amount that the lender charger on top of the money loaned.
Do thorough research to know which lender offers the lowest interest rates.

Also, ensure to check your credit score before applying. This is because your credit score will have an effect on the Interest you will be charged. 

3. Payment flexibility

It is vital to examine the lender’s payment plan to know if it’s convenient for you to pay back. It is also essential to find out how flexible they are willing to be if the payment structure does not work for you.

4. Response times

When it comes to financial matters, customer support is critical. You wouldn’t want a lender that takes a long time to process your loan or does not quickly respond to urgent queries. If their services are not as swift as you’d want, take your business elsewhere.

5. Understand the terms of the loan

Different lenders adopt different fee structures. While some lenders may sneak in additional fees such as early exit fees, others do not. So it is essential you fully understand loan terms before penning your signature on the dotted line.

Bottom Line

In reality, there are many other factors to consider when applying from a bank loan – from monthly income, monthly expenses, assets and liabilities for collateral assessment, and so on. 

These factors play a vital role in guiding your decision to take a bank loan. However, other factors are quite essential but not within reach for quick research. 

Another factor worthy of mention is different banks have different approaches and appetite to loans. While some banks may be industry-focused, some lookout more for profitability rather than interest rates. Regardless of how they like to play the game, it is crucial for you to know what game they are playing before taking them on.

Bottom line is taking the extra steps to tidy up your application documents as well as a bit of research would get you steps closer to achieving your goal. Never be in haste to accept a loan offer if the terms seem unfavourable.

Getting rejected for a loan by the bank isn’t the end of the world, the most important thing is picking up the pieces and starting again.