4.3. Obligations of Borrowers: Questions To Ponder

Unit 4: Long-Term and Short-Term Funds
4.3. Obligations of Borrowers

Questions to Ponder
1. Think about a time when you had to borrow something from someone. Did you
return it the same way and condition that you received it?
Answers may vary. A sample answer could be: I had experience borrowing a book from
my classmate. I made sure to take care of it while it was in my possession and return it in
the same condition when it was lent to me.
2. Think about a time when you had to lend something to someone. Were you able to
get it back in the same condition? How did it make you feel?
Answers may vary. A sample answer could be: I had experience lending a pair of shoes
to a friend. I felt happy that my friend took great care of it and gave it back the day I
expected it to be returned.
3. What do you think is the best way to handle borrowing things from others?
Answers may vary. A sample answer could be: Borrowers should not neglect the trust
given to them by a lender. Things lent to them should be taken care of and be returned
on or before the time that the owner expects it. Should unexpected circumstances arise,
the borrower should communicate with the owner/lender.
Check Your Progress

1. How do commercial and retail borrowers differ?
Commercial borrowers are typically businesses that borrow money to finance their
operations, while retail borrowers are individuals who borrow money for personal use.
Commercial borrowers tend to have more complex financial needs and may require
specialized lending products, whereas retail borrowers typically have simpler needs and
can choose from a variety of consumer loans.
2. What are some ways that creditors can collect on delinquent accounts?
Answers may vary. Creditors can take a few different actions to collect on delinquent
accounts. One option is to contact the borrower directly to try to work out a repayment
plan. If that is not successful, the creditor may then hire a debt collection agency to
contact the borrower on their behalf. In some cases, the creditor may also file a lawsuit
against the borrower to try to collect the debt. Finally, if the debt is still not paid, the
creditor may ultimately decide to write off the debt as a loss.
4.3. Obligations of Borrowers 1

3. What are the legal implications for businesses who fail to settle their obligations to
creditors?
Answers may vary. There can be legal implications for businesses when it comes to
creditors, depending on the situation. For example, if a business is not able to repay its
creditors, the creditors may take legal action against the business in order to get their
money back. Additionally, businesses need to be careful about how they manage their
creditor relationships, as there are laws in place that protect creditors from being treated
unfairly by businesses.
4. What happens if a borrower does not repay a loan?
Answers may vary. If a borrower doesn't repay a loan, the lender may choose to pursue
legal action in order to recover the money owed. The specific actions taken will depend
on the terms of the loan agreement and the laws of the state in which the borrower
resides. In some cases, the lender may be able to garnish the borrower's wages or seize
the borrower's assets.
5. What are the best practices on managing creditor relationships?
Answers may vary. There are a number of best practices for managing creditor
relationships, including maintaining clear and consistent communication, staying up to
date on payments, and being proactive about addressing any issues that may arise. It is
also important to develop a good working relationship with your creditors, as this can
make dealing with any problems much easier. If you have any concerns or questions
about your creditor relationships, be sure to speak with a financial advisor.
Try This
A. Identification. Write the correct answer on the provided space before each
number.
Commercial 1. These borrowers include small businesses, large

borrowers corporations, and other entities such as partnerships and
limited liability companies.
Secured creditor 2. A creditor who has a security interest in the debtor's

property, which gives the creditor certain rights in the event
that the debtor defaults on payments.

Unsecured creditor 3. A creditor who does not have a security interest in the
debtor's property and does not have the same legal rights
as a secured creditor in the event of a default.
Personal creditor 4. This creditor is someone to whom you owe money but is
not related to your business. This could be a family
member, a friend, or even a credit card company.
Real creditors 5. These creditors offer more affordable and manageable

terms and also report your payments to the credit bureaus,
so you can improve your credit score.
B. Identification. Identify whether the obligations are for the borrowers or creditors.
Choose the correct word from the box and write the correct answer on the blank
before each number.
Borrower Creditor
Borrower 1. Repay the loan in full, with interest.
Creditor 2. Notify the other party of any changes to the terms of the loan.
Borrower 3. Keep the collateral in good condition.
Creditor 4. Report payments to credit bureaus in a timely and accurate manner.
Borrower 5. Get the other party’s permission before taking any action that could
reduce the value of the collateral.
Practice Your Skills

Determine which type of borrower or creditor is described in the following scenario. Justify
your answer using one or two sentences.
1. Mr. Dela Cruz is the sole proprietor of a small grocery store. He decided to expand
the selection of items available in his store. He went to a commercial bank to look

for business loans to fund his inventories. What kind of borrower is Mr. Dela Cruz?
What consequences might await him if he fails to pay the debt he owes from a
commercial bank?
Mr. Dela Cruz is a commercial borrower. Although he is the sole proprietor of his grocery
store and has personal liability for his business’s obligations, the text clarified that he is
taking a business loan. Thus, the purpose of his loan is for his business operations and
not for personal use. The transaction will be part of the business’s assets and liabilities. If
he fails to settle this obligation, the commercial bank, a real creditor, can take his assets
and other properties to repay the debt.
2. Mang Tomas is a member of the ABC Cooperative Bank. The said financial institution
offers loans to its members to buy agricultural equipment to help raise productivity
in their area. Mang Tomas will be provided with the machinery he needs and an
amortization schedule to follow. The bank explained to him that if he defaulted on
payment, the institution would seize the equipment from his possession. What kind
of creditor is the ABC Cooperative Bank? Justify your answer.
Answers may vary. Since the ABC Cooperative Bank has the right to seize the equipment
lent to Mang Tomas, the institution is a secured creditor. Secured creditors are those
institutions with a security interest in the borrower’s property. Another possible answer
would be that the bank is a real creditor.
3. Jenna is a savings account holder in a commercial bank. The said bank told her that
she was qualified for a quick loan. The fund borrowed will be credited to her
account, and the bank will automatically deduct the amount due based on the
monthly amortization schedule. What kind of creditor did Jenna apply from? Justify
your answer.
Jenna applied for a loan from a real creditor. The bank has the right to take the payment
due from Jenna’s savings account automatically. Real creditors have legal claims on the
borrower’s assets and properties. Another possible answer would be that the bank is a
secured creditor.
4. Aling Susan is a retired government employee. She used her retirement pay to lend
money to individuals and small businesses in their barangay. What kind of creditor

is Aling Susan? Explain your answer. What can she do to collect from borrowers who
failed to pay her on time?
Aling Susan is a personal, unsecured creditor. She is an individual who lets other
individuals borrow money from her. She cannot take the borrower’s properties to pay off
debt, but she can file for legal action if the borrower breaches their agreement or
contract. The legal action against delinquent borrowers will depend on the existing laws.
5. EFG Company handles the generation and distribution of water in the local water
district in the province. The said company offers a credit line for small businesses
engaged in the agricultural production and cottage industries. When a business fails
to settle its obligations, the company simply terminates the water services for the
client. What kind of creditor is EFG Company?
Answers may vary. EFG Company is an unsecured creditor. Since the action they take is
to terminate the services, the company does not have a security interest in the
borrower’s/client’s properties.
Challenge Yourself
Analyze the given situations below and answer the questions. Provide explanations and
justifications for your answers.
1. Suppose you applied for a secured auto loan from a commercial bank two years
ago. The said loan has a term of five years. Unfortunately, a strong storm hit, and it
heavily damaged the car. What should you do as a borrower? Assume that the car is
insured.
As a borrower, I have an obligation to ensure that my debts are repaid. I also should
provide accurate and timely information. Thus, I need to inform the commercial bank
about the situation of the car, which serves as collateral for the loan I took. However, to
shield me from the financial burden, I have to submit the proper documentation to claim
the insurance for the damaged car.
2. Dan visited the office of a financial institution to apply for a personal loan worth
₱100,000. The institution’s representative showed him the different types of loans

they offer. Dan chose the one he preferred most and submitted his personal and
financial documents. He was ecstatic to find out that he qualified for the said loan.
When Dan claimed the loaned amount, he was surprised to receive only ₱95,000. He
found out that there was a processing fee of ₱5,000. Which obligations did the
creditor and the borrower fail to perform in this scenario?
In this scenario, Dan and the bank representative failed to perform their responsibilities.
Dan should have made sure that he understood the loan terms he applied for. On the
other hand, the bank representative should have made sure that Dan was informed of all
the charges included before he was made to sign the loan agreement. Typically, banks
should provide an amortization schedule to show borrowers how much they need to
repay every period.
3. You have a ₱3,000 amount that is due this week to repay a personal loan that you
asked for from a close friend. You already have this amount available. However, you
saw that a pair of shoes were on sale. You wonder if you can buy the pair of shoes
and ask your friend for an extension of the deadline for payment. What would you
do? Justify your answer.
As a borrower, I have an obligation to repay the loan I asked for regardless of whether I
took it from a close friend. Since the creditor is expecting that I will pay for the ₱3,000
this week, I should deliver this commitment and obligation. It is important because my
friend might have other financial plans or obligations.

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Unit 4: Long-Term and Short-Term Funds

4.3. Obligations of Borrowers

Check Your Progress

4.3. Obligations of Borrowers 1

Commercial 1. These borrowers include small businesses, large

Secured creditor 2. A creditor who has a security interest in the debtor's

4.3. Obligations of Borrowers 2

Real creditors 5. These creditors oﬀer more aﬀordable and manageable

Borrower 1. Repay the loan in full, with interest.

Borrower 3. Keep the collateral in good condition.

Creditor 4. Report payments to credit bureaus in a timely and accurate manner.

Practice Your Skills

4.3. Obligations of Borrowers 3

4.3. Obligations of Borrowers 4

4.3. Obligations of Borrowers 5

4.3. Obligations of Borrowers 6

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