Understanding the Role of Consumer Credit
Posted: Apr 08, 2019
Also known as consumer debt, consumer credit is a debt that a person incurs when purchasing a good or service. It is a way for people to get an advance sum of money required to pay for services or goods. The most common example of consumer credit is a person using a credit card to pay for goods and services where s/he repays the amount to the credit card company at a future date.
Consumer credit is divided into three categories:
1. Non-installment credit
This type of credit is either secured or unsecured, which largely depends on the company offering the credit. This credit doesn’t include monthly payments of a set figure. Instead, it is a system of credit which is payable in one lump-sum amount by a specific date. Non-installment credit is the simplest form of credit and is usually a very short term loan, say thirty days. The common example of non-installment credit is - stores offering credit to their regular customers. This allows store to make sales and get money in future.
2. Installment credit
Installment credit is a form of debt with specified monthly payments, terms and interest. It is a common form of credit that includes mortgages, car loans, personal loans, and student loans. While applying for an installment credit, a person usually looks for a few crucial terms – principal loan amount, interest rate, term length, monthly payments (EMIs), origination, and other fees. The repayment period for an installment loan can vary from months to years. Student loans, mortgages, auto loans and personal loans are some common examples of this type of credit.
3. Revolving credit
Revolving credit is that line of credit where a customer pays a commitment fee to a financial institution to borrow money; after that, s/he is allowed to use the funds when needed. The amount drawn can fluctuate every month depending on the customer’s cash flow needs. For an individual, borrower’s ability to repay revolving credit is issued is judged on several factors, including credit score, current income, and employment stability. For a company, the factors vary from balance statement, income statement and statement of cash flow. Revolving credit is ideal for individuals and entities which undergo sharp fluctuations in cash flow or unexpected expenses. However, due to convenience and flexibility, a higher interest rate is charged on this type of credit.
Why is consumer credit important?
Consumer credit is frequently measured by economists and other financial analysts as it is an important indicator of economic growth. For instance, if consumers can easily borrow money and repay those debts timely, the economy is said to be growing. It operates on the theory that consumers cannot significantly increase their borrowing limits until there is a sufficient rise in their personal income that can satisfy the higher debt load. A rise in borrowing shows the largest upsurge when the economy is coming out of recession.
Professionals often take help of tailored courses to learn several aspects of consumer credit, including – understanding the lending process, the role of card services, educational financial services, auto loans, personal loans, and commercial services. In addition, consumer credit also gives clues about the potential future spending levels.
Consumer credit lets consumers get an advance or loan to spend money on products and services for personal use, household or family at a specified future rate.
What does a consumer credit report contain?
- A detailed breakdown of loan figures, like average maturity and prevailing interest rates
- Seasonal adjustments
- Comparison against previous month/year and results from the last five years
What does a consumer credit report fail to show?
- A Consumer credit report shows only total growth in outstanding loans. There is no way to know if consumer payments have fallen off or new loan growth has slowed on the basis of falling consumer credit number. In addition, lack of home-equity debt doesn’t give a complete picture because it is issued after the consumer confidence and retail sales reports for the month.
Pros of Consumer Credit
The key benefit of consumer credit is that consumers can purchase goods and services and pay for them later. This facility comes very handy when funds are low. Consumer credit offers a backup form of payment in fixed monthly payments.
Cons of Consumer Credit
Cost is the major disadvantage of consumer credit. If a consumer fails to repay a loan or a credit card balance, it impacts their credit scores, terms and conditions, and may result in late fees and penalties.
Want to learn more about consumer credit? Take help of the tailored professional courses. Whether you are a professional working in the finance sector or just a curious learner, you can learn more about auto loans, personal loans, and commercial financial services through specially curated courses on consumer credit.
Avinash is an entrepreneur and loves to share all his experiences and learnings with his readers and followers to encourage them. In his free time, you will find his enjoying soccer with his friends.