Types of Credit

Posted by Credit Nigeria

Blog, Credit

Recap

Revolving Credit: Flexible, for continuous use like credit cards.
Installment Credit: Fixed amounts, repaid over time, for big purchases.
Open Credit: Full balance payments regularly, like utility bills.
Secured vs Unsecured: Collateral-based versus higher risk loans.
Payday Loans: Short-term solutions with caution due to high interest.
Microcredit: Empowering small businesses with accessible loans.

In the diverse world of finance, credit takes on various forms, each serving different needs and purposes. In Nigeria, understanding these types can help individuals and businesses make informed decisions about their financial strategies.

1. Revolving Credit

Revolving credit is like a financial reservoir that you can repeatedly draw from and replenish. The most common example is a credit card. You’re given a credit limit, and as long as you pay back what you’ve spent, you can continue to use it. This type of credit is handy for daily expenses and offers flexibility in repayment, though it typically comes with higher interest rates.

2. Instalment Credit

Instalment credit involves borrowing a fixed amount and repaying it in regular instalments over a set period. Loans for cars, homes, and education often fall into this category. This type of credit is ideal for significant, one-time expenses and offers the predictability of fixed repayment schedules.

3. Open Credit

Open credit is a more flexible arrangement where the full balance is meant to be paid at the end of each period. Utility bills are a common example. While not traditionally considered as ‘credit,’ these arrangements demonstrate trust and financial reliability.

4. Secured and Unsecured Credit

Secured credit is backed by collateral, such as a house in a mortgage or a car in an auto loan. If the borrower defaults, the lender can claim the collateral. Unsecured credit, like most personal loans and credit cards, doesn’t require collateral but often has higher interest rates due to the increased risk for the lender.

5. Payday and Short-term Loans

Especially relevant in Nigeria are payday and short-term loans. These are usually small, unsecured loans meant to cover expenses until the next payday. While they can be convenient, they often come with high interest rates and are best approached with caution.

6. Microcredit

Microcredit is a type of credit often associated with microfinance institutions. It’s designed to support small business owners and entrepreneurs who may not have access to traditional banking services. These loans are typically small but can be crucial in helping small businesses grow.