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THE letter of credit is a financial instrument used in the context of consortia.
It plays a crucial role in enabling the acquisition of goods or services in a planned and structured manner.
In this article, you will discover what it is, how it works and the main features ofthis product.
What is a letter of credit?
Do you dream of acquiring a high-value asset, such as a new car, your own home, or even a dream trip?
But did you know that traditional financing can be a burden on your pocket with high interest rates and long terms?
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So, the letter of credit could be the key to achieving your goals more intelligently and economically!
This letter is a title issued by a consortium administrator after the consortium member has been considered in a specific group.
It works like a "shopping voucher" for the contracted amount, allowing the purchase of goods or services in cash at various accredited establishments.
In summary, we can divide them into three main stages. The first is contemplation.
In this initial stage, it is granted to the consortium member when their share is awarded, either through a draw or bid.
The second stage is the specific value, it specifies the value of the asset that will be acquired once the contemplation occurs.
Finally, we have the cash purchase, upon receiving the award, the consortium member can purchase the asset as if he were paying in cash, which gives him greater bargaining power.
Types of letter of credit
There are different types of letters of credit, each aimed at a specific category of goods.
For example, the letter of credit for light vehicles is intended for the purchase of automobiles, such as passenger cars.
While the by motorcycle, is used in purchase of motorcycles, certainly.
Among the types, we also find the letter of credit for trucks and heavy vehicles, aimed at the purchase of trucks, buses and other large vehicles.
Finally, we highlight the most sought after and popular in consortia, letter for real estate.
It is essential for anyone looking to purchase a house, apartment or land.
Unlike housing finance, real estate letter of credit needs to be considered before purchase.
+ Loan or consortium: find out which is the best alternative
How does the consortium with the letter of credit work?
When you join a consortium with a letter of credit, you become a member and contribute a predetermined amount monthly.
The shares are used to form a "common fund" which, in turn, is used to benefit other shareholders through draw or bid.
THE prize draw It is carried out periodically, usually through assemblies or electronic systems.
Each participant has a number that participates in the drawing. If your number is drawn, you are selected and receive the prize. letter of credit.
About that, in the throw method, the shareholder can offer an additional amount to his/her regular share, called a bid.
The bid increases the chances of being considered at the next meeting.
If your bid is the highest or one of the highest, you are successful and receive the letter of credit.
+ Special check: get answers to your main questions about this service
Some advantages and disadvantages
This type of credit, like any other, involves advantages and disadvantages.
In this topic we will highlight the main ones, starting with the advantages.
First of all, let's highlight flexibility, because you can use the letter of credit to purchase the good or service you really want, when it is most advantageous.
Additionally, it increases your negotiating power, as you can pay upfront and negotiate the best terms.
With this option, you can also say goodbye to the high interest rates of traditional financing.
Another advantage is that it can be an interesting tool for financial planning and also for protection against unforeseen events.
In other words, in cases of unforeseen circumstances, you can use the letter of credit for other bureaucratic purposes, for example.
Now, it's time to mention some disadvantages, and we start with the waiting time, which can be very long, depending on the plan and the member's luck.
In addition, it is also necessary to have a lot of discipline and financial planning to keep your monthly payments up to date.
In addition to the monthly fees, there are other fees such as membership fees, administration fees, and reserve funds.
Frequently asked questions:
1. What is the difference between a letter of credit and payroll loan?
The letter of credit is issued by a consortium administrator, while the payroll loan is a type of loan with a direct discount on the payroll.
2. Can I use the letter of credit for any goods or services?
Yes, the letter of credit can be used to purchase various goods or services, as long as they are within the contracted value and accredited by the administrator.
3. What happens if I withdraw from the consortium before the award?
In this case, you will be able to redeem the accumulated value of your shares, however, deducting the administrative and termination fees.
4. Is it good to make a letter of credit?
Yes, as long as you are willing to wait for consideration to make your dream of the planned acquisition come true.
5. Is it possible to buy or sell the contemplated letter?
Yes, it is possible, but it is important to follow the rules and guarantees established by the administrators.
6. Is it possible to receive the letter in cash?
No, the letter of credit is not deposited directly into the consortium member's account. The administrator makes the payment to the seller.
7. How long is the letter of credit valid?
The validity period varies depending on the contract, but it is essential to check this information.
Conclusion
THE letter of credit It is an excellent option for those looking to make their dreams come true with intelligence and savings.
However, it's essential to choose a plan that fits your financial situation and have the discipline to keep your monthly payments up to date.
