Types of credit instruments may include promissory notes.
Credit instruments are items used in lieu of currency. Almost all natural and legal persons use some type of credit instrument on a daily basis. The ability to use such an instrument instead of currency is based on the fact that the debtor and the recipient agree to the use of the instrument and there is a reasonable expectation that the alternative form of payment will be met.
One of the first forms of credit instrument is the check. Used by consumers as a legitimate means of payment for goods and services received, the amount of the check is backed by funds that are deposited into a bank account. Upon presentation of the check by the recipient, the bank deducts the specified amount recorded on the check by the debtor. Although the check is no longer the main credit instrument used in many financial transactions, it is still used by many companies and individuals.
The credit card is another example of a common credit instrument. The use of a credit card to pay for a purchase creates a contract between the buyer and the seller. Basically, the seller gives the buyer credit on the assumption that the card company will cover the purchase price. In turn, the credit card issuer anticipates that the cardholder will end up paying the amount owed along with the corresponding interest and finance charges.
A third type of credit instrument is the promissory note. With this arrangement, debtors receive funds from creditors with the understanding that the note will be paid in full at some point in the future. This type of debtor obligation may have a fixed repayment date or be indefinite. Promissory notes can be used to lend funds between individuals or between two business entities.
There are two main advantages to using a credit instrument. First, the consumer does not need to carry a large amount of cash to make purchases. Second, the instrument can usually be replaced relatively easily when it is damaged, lost, or stolen. This is in contrast to cash, which generally cannot be replaced when it is damaged, stolen or lost.