---
title: "Credit"
url: "https://mahouse.world/glossary/credit"
type: "glossary term"
author: "Ihor Vlasov"
reviewed: "2026-09-30"
published: "2026-09-22"
---

# Credit

Credit is an arrangement in which a lender provides money, goods or services now in exchange for the borrower's promise to repay later, usually with interest or fees. It covers loans, credit cards, overdrafts, trade credit between businesses and buy-now-pay-later, and its price reflects the lender's view of how likely the borrower is to repay.

**Also known as:** Lending, Borrowing, Loan finance, Debt finance

## Key facts

- **Origin:** from the Latin creditum, a loan, from credere, to trust or believe
- **Forms:** secured against property or other assets, or unsecured; instalment (fixed repayments) or revolving (a limit drawn and repaid at will, as with cards); consumer or commercial
- **Cost:** interest plus fees; in the US the Truth in Lending Act of 1968 requires consumer lenders to disclose the cost as an annual percentage rate (APR)
- **UK regulation:** the Financial Conduct Authority has regulated consumer credit since 1 April 2014, taking over from the Office of Fair Trading; the Consumer Credit Act 1974, much amended, still sets many of the rules for regulated agreements
- **Accounting:** lenders reporting under IFRS 9, in force since 1 January 2018, provide for expected credit losses in advance rather than waiting for defaults
- **Parties:** borrowers, lenders (banks, non-bank lenders, fintech platforms), credit bureaus, the funders who finance non-bank lenders, and regulators

## How credit works in practice

A lender deciding whether to extend credit asks three questions: will this borrower repay, what happens if they do not, and what does the money cost? The first is underwriting — credit files, income, affordability, a business's cash flows. The second is security and recovery — collateral, guarantees, covenants and collections. The third is funding — deposits for a bank, warehouse facilities or securitisation for a non-bank lender. The rate charged has to cover the cost of funds, expected losses, operating costs and a return on the capital held against the risk.

Fintech has changed where credit is offered more than what it is. Buy-now-pay-later appears at checkout, working-capital loans appear inside a payments dashboard and are repaid from card takings, and lending sits inside accounting or e-commerce software. The borrower sees a button; behind it, someone still underwrites, funds and collects.

For an investor or acquirer, a credit business is valued on its book, not its growth. The numbers that matter are loss rates by vintage (each month's lending tracked through to maturity), provisions against expected losses, the cost and stability of funding, and the spread between what the book earns and what it costs. Fast growth can make a book look healthier than it is, because new loans have not yet had time to default — which is why diligence reads the oldest vintages first.

## Example

A small-business lender advances £60 million a year in 12-month loans, earning an average 18% a year. It funds the book through a warehouse facility costing 9%. It expects 6% of principal to default with 30% recovered, a net loss of 4.2%, and its operating costs run at 3.5% of the book. That leaves a margin of 1.3% before tax — thin, and gone if losses rise by a third. A buyer checks the 2023 and 2024 vintages, finds actual net losses of 5.1% on the older one, and cuts its price on the assumption that the newer loans will season the same way.

## Common mistakes

- Judging a loan book by today's default rate while most of it is too young to have defaulted.
- Pricing credit on the headline rate without the cost of funding and expected losses.
- Treating checkout or embedded credit as a payments product; it is lending, with lending rules.
- Assuming the funding line will always be renewed on the same terms.
- Confusing credit in the lending sense with a credit entry in double-entry bookkeeping.

## Related terms

- [Credit Rating](https://mahouse.world/glossary/credit-rating.md)
- [Covenant](https://mahouse.world/glossary/covenant.md)
- [Senior Debt](https://mahouse.world/glossary/senior-debt.md)
- [Buy Now Pay Later](https://mahouse.world/glossary/buy-now-pay-later.md)
- [Embedded Finance](https://mahouse.world/glossary/embedded-finance.md)
- [Counterparty Risk](https://mahouse.world/glossary/counterparty-risk.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-30. https://mahouse.world/authors/ihor-vlasov