(i) Every loan agreement specifies an interest rate which the borrower must pay to the lender along with repayment of the principal.

(ii) In addition, lender may demand collateral, i.e., an asset that the borrower owns and uses this as a guarantee until the loan is repaid.

(iii) If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.

(iv) Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.


(v) The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.