4.2.1 How credit works

You (the borrower) borrow a sum of money from a lender. You must repay the principal in full, with interest, usually within a specified time frame. Some loan agreements specify equal bi-monthly, monthly or annual payments, while others require a single payment of both principal and interest.

Normally the lender conducts a credit check of your credit history to see if you are a good credit risk—that is, if you are likely to repay the loan in full and on time. If not, the lender may refuse to offer you the credit or you may have to pay a higher rate of interest.

Some loans require nothing more than your promise to pay. Others require you to pledge certain assets as collateral as security for repayment of the loan.


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