A credit transaction is a legal agreement o Interest on Installments:

where one party (the creditor) extends credit Sellers often charge interest on
to another party (the debtor) in exchange for the unpaid balance.
the promise to repay, usually with interest, at
a later date. Common examples include loans, Example: A customer purchases a car on
credit sales, and the issuance of bonds. credit, agreeing to pay $500 per month over 3
years, with the seller holding the title until full
payment is made.
2. Basic Elements of a Credit Transaction
 Parties Involved: c. Secured Transactions
1. Creditor (Lender): The party  Definition: A credit transaction where
that extends the credit or loan. the debtor provides collateral as
security for the loan. The creditor has a
2. Debtor (Borrower): The party
legal claim (security interest) on the
that receives the credit and
collateral in case the debtor defaults.
agrees to repay.
 Common Collateral: Property,
 Principal: The initial amount loaned or
vehicles, real estate, or other valuable
credited to the debtor.
assets.
 Interest: The fee charged for
Legal Framework:
borrowing funds, typically expressed as
a percentage of the principal. o Security Agreement: A written
agreement that specifies the
 Payment Terms: The schedule and
collateral and terms.
conditions under which the debtor must
repay the principal and interest. o Perfection of Security
Interest: The creditor must take
steps (e.g., filing a financing
3. Types of Credit Transactions statement) to make the security
interest enforceable against third
a. Loan Contracts parties.
 Definition: A loan is a credit Example: A mortgage is a secured loan
agreement where a creditor provides a where the house serves as collateral, and the
sum of money to a debtor, who agrees bank can foreclose on the property if the
to repay it with interest over a specified borrower defaults.
period.
 Legal Requirements: A valid loan
contract should specify the amount of d. Unsecured Transactions
the loan, the interest rate, repayment
 Definition: A credit transaction where
terms, and consequences of default.
no collateral is provided. The creditor's
Example: A bank lends $10,000 to a small only recourse in case of default is to
business owner with a 5% interest rate, sue the debtor.
payable in monthly installments.
 Higher Risk for Creditors: Since
there is no collateral, creditors may
charge higher interest rates to
b. Sales on Credit (Installment Sales) compensate for the risk.
 Definition: In a sales credit Example: A credit card is an unsecured credit
transaction, the seller allows the buyer transaction where the cardholder borrows
to take possession of goods or services money to make purchases and agrees to
now and pay for them later, either in a repay it later with interest.
lump sum or installments.
 Common Terms:
e. Credit Cards
o Retention of Title Clause: The
seller retains ownership of the  Definition: A revolving credit
goods until the buyer fully pays. arrangement where a bank or financial
institution allows the cardholder to
 make purchases up to a certain limit payment terms (e.g., misses a payment
and repay over time. or fails to repay the loan by the due
date).
 Terms and Conditions:
b. Creditor’s Remedies
o Credit Limit: The maximum
amount the cardholder can 1. Demand for Payment: The creditor
borrow. can demand full payment of the
outstanding balance.
o Minimum Payment: The
smallest amount required to be 2. Repossession (Secured
paid each month. Transactions): In secured credit
transactions, the creditor can repossess
o Interest Rates: Interest accrues the collateral if the debtor defaults
on unpaid balances at a specified (e.g., foreclosure on a mortgage or
annual percentage rate (APR). repossession of a car).
Legal Regulation: Credit card transactions 3. Lawsuit (Unsecured Transactions):
are subject to consumer protection laws, For unsecured credit, the creditor can
which regulate interest rates, fees, and file a lawsuit to recover the outstanding
disclosures to prevent predatory lending. debt, and the court may issue a
judgment to seize the debtor’s assets
or garnish wages.
4. Legal Doctrines and Principles
Governing Credit Transactions 4. Acceleration Clause: Many credit
agreements contain acceleration
a. Contractual Obligations clauses, which allow the creditor to
demand full payment of the loan if the
 Mutual Agreement: Credit
debtor defaults on any payment.
transactions are enforceable only if
both parties voluntarily agree to the
terms.
6. Consumer Protection in Credit
 Capacity to Contract: Both the Transactions
creditor and debtor must have the legal
capacity to enter into a contract (e.g., a. Truth in Lending Act (TILA)
must be of legal age, mentally  Purpose: Ensures that creditors
competent). disclose key terms and costs of the
 Consideration: There must be credit transaction, including the interest
something of value exchanged (the rate, finance charges, and total amount
loaned money or goods in exchange for due, so consumers can make informed
the debtor’s promise to repay). decisions.

b. Usury Laws b. Fair Debt Collection Practices Act

(FDCPA)
 Definition: Usury laws set the
maximum interest rates that can be  Purpose: Protects consumers from
charged on loans or credit agreements. abusive and unfair practices by debt
collectors. Limits the ways in which
 Purpose: Protect debtors from creditors or debt collectors can contact
excessively high interest rates and and pressure debtors to repay.
unfair lending practices.
Example: If a loan agreement specifies an
interest rate higher than the legally allowed 7. Bankruptcy and Insolvency
rate, the court may declare the loan void or  Insolvency: When a debtor is unable
reduce the interest to the legal limit. to meet their financial obligations, they
may declare insolvency.

5. Default and Remedies for Breach  Bankruptcy: Legal process by which

debtors can discharge (wipe out) or
a. Default reorganize their debts.
 Definition: Default occurs when the
debtor fails to meet the agreed-upon
 o Chapter 7 Bankruptcy:
Liquidation of assets to pay
creditors.
o Chapter 13 Bankruptcy:
Reorganization of debts, allowing
the debtor to keep assets and
repay creditors over time.

Summary of Key Points:

1. Credit transactions involve deferred
payments, governed by contracts
between creditors and debtors.
2. Types include loans, installment sales,
secured and unsecured credit, and
credit cards.
3. Legal frameworks such as usury laws
and consumer protection statutes
regulate interest rates and ensure fair
treatment.
4. Creditors have remedies for defaults,
including repossession, lawsuits, and
foreclosure.
5. Bankruptcy offers debtors legal
protections when unable to pay their
debts.
This framework provides a structured legal
understanding of credit transactions, focusing
on both the rights of creditors and protections
for debtors