The granting of credit by banks increases the money supply, in turn the bank lets the borrower repay the amount based on agreed terms and interest. All credit money created by bank lending and the purchase of assets by banks, can disappear through debt management and disposal of assets by banks.
It is neither sensible nor desirable that significant amounts in loans are not repaid, otherwise the money supply shrinks leading to lack of liquidity in the economy.
Credit agreements could be taken as cash advances or partly as bills of exchange in the form of letters of credit, loans or credit in exchange for the right (normally occupational) needs of the borrower.
Credit is not necessarily based on formal monetary systems. The credit concept can also veer off the conventional monetary systems, by being applied in barter economies on the grounds of direct exchange of goods and services.
Opposite to money, credit cannot function as a unit of account, but numerous kinds of credit are capable of working as a medium of exchange.
One of the most common forms of credit is the loan, it is the contractually stipulated granting of money or goods by the lender to a borrower. The deal between the parties has a fixed repayment agreement. For annuity loans, the rate includes only interest and a repayment component, which increases proportionally in the course of a repayment period.
Central banks play the role of being the lender of commercial banks, they offer the pledge of securities, and bank loans to commercial banks which can get in return, credited central bank money. The commercial banks can borrow under the marginal lending facility whenever necessary by borrowing against pledged assets to the central bank.
Credit is employed in commercial trade under the term trade credit denoting the approval of delayed remittances for the acquired items. Consumer debt on the other hand can be specified as money, goods or services supplied to someone in place of payment. The debt could be in relation to personal loans, credit cards, mortgage loans among others.
Loans are available to a particular form of cash loans, the limit is often automatically based on the average number of regular payments, such as salary or pension payments.
Working capital loans are cash advances for financing current assets, and are frequently granted as credit lines on current accounts. Generally they are structured as a revolving credit, in addition to the commissions paid to loan interest rates.