Consumer Credit

Consumer credit refers to the credit facility provided by financial institutions, usually like loans to its users to purchase goods and services. Examples include credit card payments, consumer durables loans, and student loans.

The payment against customer purchases flows from financial institutions, and customers pay back the financial institution for their credit payment services in the future. It indicates the absence of immediate payment from the customer side. The customer makes the repayment either in the form of EMI payments or makes a one-time payment.

• Consumer credit refers to the credit facility financial institutions provide to their customers for purchasing goods and services. Common examples are credit card payments, consumer durables loans, and student loans.
• Financial institutions pay the sellers on behalf of the customers, and customers repay the financial institutions in the future based on predetermined terms and conditions.
• One of the common classifications is categorizing into revolving and installment credit.
• It plays a vital role in stimulating economic growth. However, its misuse causes racking up of debt.

Consumer credit allows consumers to satisfy their needs and wants even if they don't have the money at the moment of purchase. In essence, consumers borrow money from financial institutions and other creditors. In this process, businesses are benefitted from increased sales; consumers meet their requirements, and financial institutions get interest income along with the principal amount.

The loan structure or repayment schedule and collateral requirements vary with the type of credit. The factors like credit limit, monthly installment, and tenure will be based on the predetermined terms and conditions. Also, it may vary with the creditors or financial institutions. Usually, buying on credit in these cases does not require collaterals; hence it is mostly an unsecured form of debt. However, in the case of loans taken for durables like cars, the product purchased forms the collateral by default.

In the United States, institutions like Consumer Credit Union, based in Gurnee, Illinois, offer different products and financial counseling for consumers contributing to their financial independence. Products include credit cards, home loans, product loans, checking accounts, etc.

The Huabei, a virtual credit card by Ant Group, is an example of a lending service for customers. The brand name itself indicates "Just Spend" in Mandarin. It is one of the most outstanding credit services, facilitating credit payments or small loans for the daily expenditure of consumers. Credits are usually offered independently by banks and Ant's finance wing. Furthermore, Huabei now shares the credit report of its users with the financial credit information database of the People's Bank of China (PBOC).

The well-known types are revolving credit and installment credit. This classification is based on various factors like repayment structure and collateral.

#1 - Revolving Credit

Generally, a revolving credit account user can spend any amount at any time at their discretion but not cross the predefined upper limit. There is a repeating spending limit and duration. For example, in the case of credit cards, users can utilize the repeating credit facility every month. The user can pay back the total credit used part by parts like a fixed amount per month or quarter. The credit keeps on revolving in a cyclical process where individuals can buy different goods and services. The credit issuing company has the right to close the account if the individual cannot make timely payments. Credit cards business or personal lines of credit are prominent examples of revolving credit.

#2 - Installment Credit

Installment credit occurs when the customer takes banks or other financial institutions' help to get a fixed amount to buy particular consumer goods and services. Upon receiving the credit, the customer buys the item and pays for it in a set amount, including the interest calculated in monthly installments. Car loans, personal loans, etc., are examples of installment closed credit. However, once it is taken for a purpose, the amount availed is fixed, and usually, a top-up loan is not allowed.

Consumer credit playing a vital role in the economy has pros and cons. Let's look into some of them: 

Pros

• Financial freedom & flexibility: The credit services offer the flexibility of options. Consumers can purchase per choice within their credit limit even if they don't have enough income at present but have earning potential.
• Credit card reward programs: Credit card companies lure or maintain customers with reward systems like cashback offers, reward points, and miles. Customers may choose credit or reward cards over cash or debit payments to earn reward points.  
• Enhance credit score: If the customer is disciplined with credit card repayments, it gives opportunities to build a good credit history.

Cons

• Credit card debt: Credit card misuse and overspending lead to the racking up of credit card debts.
• Compulsive buying: Easy availability of credit intensifies compulsive buying. When an individual has a credit card with them, a specific tool, it fuels their temptation to purchase more than is required. As a result, most people buy things in bulk and regret them later.
• Financing cost: It comes with a cost in the form of interest or fee payment.
• Interest rates and penalties: It is the most distressing part. It happens if the consumer defaults on the payment. In that case, they are usually penalized with a higher rate of interest, which becomes very hard to settle and certainly affects the user's credit score.

This has been a guide to Consumer Credit and its meaning. Here we discuss the examples & types of consumer credit, citing its counseling services, unions & acts. You can learn more from the following articles - 

• Consumerism
• Fair Credit Reporting Act (FCRA)
• Consumer Loan