what is payment on credit

The credit form is a payment method existing in the economy in which it is made in a period of time after the time of purchase or acquisition and with previously agreed interests.

Satisfying a payment commitment under the credit modality means that an economic transaction is not instantaneous. That is, there is a delay or wait for the payment itself to be made under a prior convenience among the participants.

It is common for late payment of an acquired good or service to be made through installments or in a single payment at the end of a certain period (due date). In both cases the existence of interests or conditions agreed between creditor and debtor is frequent.

In that sense, the fact of paying on credit goes hand in hand with an increase in the price taking into account the interests to be assumed by the acquirer or buyer.

Thus, it becomes possible to have a product available in exchange for future income or profits.

Characteristics of payment on credit

Compared to other payment methods, the payment by means of credit involves a series of main features:

  • It is usually the predominant modality in purchases or transactions of large amounts, either for security or for non-availability of said amounts at the time of the operation
  • It is common the participation of banks and credit institutionsto carry out transactions
  • This form of payment energizes the economy and stimulates trade. It also discourages savings by allowing families and businesses to purchase products before they have their entire purchase amount.
  • Sometimes it is essential for the purchase to disburse an initial part of the total amount as an entry. A clear example is in the housing market where payment is made on credit through a mortgage loanwith mandatory initial entry

Given the frequency of credit payments, multiple products have been developed on a day-to-day basis, such as credit cards or promissory notes .

Example of payment on credit

Imagine we have to buy a table. It is Friday and we will receive our salary on Monday. However, we need the table to study Tuesday’s exam because the previous one broke. Paying on credit allows us (for example, through a credit card) to have the table before disposing of our salary.

Although applying for loans has interesting advantages, we must always take into account commissions and interest rates. Buying on credit (especially through credit cards) can be very expensive and it is advisable to use it only when we are financially compensated to do so.

by Abdullah Sam
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