Policies are a type of document used in the formalization of insurance and some types of economic activities in which there is also a set of rights and obligations on the part of the insured and the insurance company. There are several types of policies, one of them the credit policy , which is used in bank loans .
The credit policy is a type of financing instrument that is granted by a banking institution that allows the user to dispose of the money only when it is needed and in the fair amounts that the client will need.
- Characteristics of the credit policy
- What is it for
- How does it work
- Interest on a credit policy
- How it is accounted for
- Importance of the credit policy
Characteristics of the credit policy
Among the main characteristics that can be found in a credit policy we mention the following:
- In this type of bank loan , the money is not reflected in the bank account as a positive balance .
- The interest on the loan should only be paid on the amount of money that is withdrawn .
- It is a type of financing line .
- The user can have the money they need at a certain time and the amount they need, but they cannot withdraw all the money at the same time.
- In general , interest must be paid annually .
- It is a type of credit that can be renewed .
- The money is deposited in a special account for credit created by the banking institution for the client.
- Credit policies must have important information that includes the amount granted to the client, the expiration period of the same and the commissions and interests that are applicable to the credit.
- It is characterized by having four types of commissions : opening , balance drawn , non-availability and interest for exceeded .
What is it for
This type of line of credit or bank loan is very useful for all small businesses or SMEs and for entrepreneurs type autonomous because it helps them solve and deal with a number of problems that may actually arise as to terms of liquidity in the short term . It is one of the best ways to meet the different needs that arise for short-term economic funds.
How does it work
Credit policies and being able to understand how they work is essential for companies since it is quite different from the way a normal credit works, and, when it is not given the correct treatment, it can become a real problem.
This type of policy is a kind of fast service that implies that if the bank customer runs out of money, they can resort to it to satisfy and fulfill their financial needs. For their operation, they must be associated with a special checking account . Payments for it can usually be made on a quarterly basis . Another important aspect about its operation is that the credit policy can perfectly be renewed after the term expires and can also be paid in advance.
The conditions that must be taken into account to request this type of policy are the following:
- Maximum available capital : refers to the maximum amount that the client can use during the credit period.
- Expiration : all these policies have a previously established expiration period that is generally one year.
- Interest on the balance : in this case, the interest paid is on the amount that has been used over time and not on the total amount of the credit.
- Interest exceeded : this interest rate is applied in those situations where the amount of the credit has been exceeded.
Interest on a credit policy
The interest on the credit policy is generally paid after one year has elapsed from the date the loan is issued. It is important to remember that these interests will only be calculated on the amount of money that was withdrawn by the beneficiary, regardless of whether the original amount was higher than what was needed.
Generally, a method known as hamburger is used which is based on the calculation of account balances showing bank movements, following a series of steps mentioned below.
- Calculate the balance of the account each time a bank movement is made.
- The number of days in which the balance was in effect is calculated .
- The calculation of business numbers is performed . This operation is carried out by multiplying each of the balances by the number of days it remains.
- The corresponding interest is calculated .
How it is accounted for
In order to be able to account for this type of credit policy when it is short-term , the following accounting plan is used for its movements:
- A payment will be made based on the amounts that have been arranged by adding a charge.
- It will be paid for the expense that has been made up to the total value of the debt with its charge to the account of a subgroup 662.
- The product of the total or partial cancellation will have a credit charge to the accounts that belong to subgroup 57.
In the event that the credit policy is long-term , which is not very common, the following accounts are available to intervene:
- A long- term debt with the bank.
- Credits are made for the sum of money that has been disposed of with their respective charges to the accounts that belong to subgroup 57.
- It is paid for the expense that has been generated until reaching the total value of the debt, with its respective charge.
- A charge is made to the accounts of subgroup 57 for the total or partial cancellation of the debt.
Importance of the credit policy
This type of policy is important because it gives important advantages to clients who need it, especially business owners or independent workers, as it can be adapted to their needs. It is a way of being able to pay for financing that is actually needed at the moment and not for the total capital that may be available, as is the case with normal bank loans.
It is also a very flexible policy for financial institutions since they can have the necessary amounts of money depending always on the needs that arise, it is very comfortable for users because they work in the same way as a current account, which is also important for debtors. Finally, you only have to pay for the money that is withdrawn, so if you know how to use it correctly, it can mean significant financial savings for users who opt for this type of policy.
A client decides to request a credit policy for 50,000 euros establishing a term of one year, which begins on February 1 and ends on February 1 of the following year. It is during this period of time that this client can withdraw money or, can also leave it intact. To do this, you must have a checking account connected to the credit policy and have an established maximum amount. During this period, the user can make use of the money they need at the right time. In this period of time, a deadline for money withdrawals is also established, for example, December. When the client withdraws money after this date, the policy will begin to earn extra interest.