Consumer Finance

According to E.R.A. Seligman, “The term consumer credit refers to a transfer of wealth, the payment of which is deferred in whole or in part, to future, and is liquidated piecemeal or in successive fractions under a plan agreed upon at the time of the transfer”.

According to Reavis Cox, consumer credit is ‘”a business procedure through which the consumers purchase semi-durables and durables other than real estate, in order to obtain from them a series of payments extending over a period of three months to five years, and obtain possession of them when only a fraction of the total price has been paid”.

Introduction to Consumer Finance

During earlier times the trend of people was to save first and spend later. But today it has been changed to spend today and pay later. The culture, life style, spending pattern, priority of needs etc. have been changed far and wide. Earlier people used to borrow money for construction of a house, to start a business or to purchase some land, or needs of that order. But today people need money for acquiring consumer durables also.

It is felt sometimes that people give more emphasis to amenities than for permanent assets like land, house etc. A stylish house in a posh area, a car, computer, television, stereo system, a cooking range, washing machine, grinder, mobile phone etc. which only a minority used 10 years back have become part of life (or ambition) of an average civilian. As they need money for satisfying these needs naturally facilities to finance also emerge.

The branch of banking which facilitate finance for purchasing consumer durables is called ‘consumer finance’ or ‘consumer credit’. Today it has become part of life of an average Indian as they need credit in large quantity to meet their needs of various kinds. This emerging set of wants and consequent need for funds multiplies the scope and role of consumer finance.

Considering the busy nature of borrowers, fanciers provide customer friendly products and services at their doorstep on easy terms. As India is a country with billions of spend thrift untapped population, who are competing each other in acquiring newer and newer consumer durables and as an element of prestige is linked in owning these assets, it is sure that, without any set back, ‘Consumer Finance’ will have brighter future and will hit better targets in the forthcoming era of consumerism.

Meaning and Concept of Consumer Finance

Consumer finance refers to the raising of finance by individuals for meeting their personal expenditure or for the acquisition of durable consumer goods. It is an important asset based financial service in India. This include credit merchandising, deferred payments, installment buying, hire purchase, pay-out of income scheme, pay-as-you earn scheme, easy payment, credit buying, installment credit plan, credit cards, etc.

Consumer durables include Cars, Two Wheelers, LCD TVs, Refrigerators, Washing Machines, Home Appliances, Personal Computers, Cooking Ranges, and Food Processors etc. Under consumer finance scheme, the consumer or buyer pays a part of the purchase price in cash at the time of the delivery of the asset, the balance with interest over a pre­determined period of time.

The objective of consumer finance is to provide credit easily to the consumer at his door steps. Both private and public sector finance companies provide consumer finance to purchase ‘consumer goods and construction of such goods (building materials, iron rods, cement etc.). Multinational finance companies are also engaged in consumer finance in India. Usually the credit/finance is extended for a period of 2 to 5 years.

Features of Consumer Credit

1. Consumer credit is a method of financing semi-durables and durables.
2. It assists consumers to acquire assets.
3. Consumers get possession of the assets immediately when a fraction of the price is paid.
4. The balance payment is payable in installments over an agreed span of time.
5. The duration of the finance normally ranges between three months to five years,
6. It is an agreement between parties to the contract.
7. When there are only two parties to the contract, it is called a Bipartite Agreement (the customer and the dealer cum financier) and where there are three parties, such agreements are called Tripartite Agreements (the customer, the dealer and the financier.)
8. The structure of financing may by way of hire-purchase, conditional sale or credit sale. In the case of both hire purchase and conditional sale, ownership of the asset is transferred only on completion of all the terms of agreement. But in the case of credit sale ownership is transferred immediately on payment of first installment.
9. Generally advances are made on the security of the asset itself and
10. It involves down payment normally ranging from 20 to 25% of the asset price.

Forms/Types of Consumer Credit

Following are the different forms for financing consumers:

1. Revolving Credit

It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be sanctioned to the customer and the customer can avail credit to the extent of credit limit sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.

2. Cash Loan

In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions for purchasing the required goods from seller. Banker acts as lender. Lender and seller are different. Lender does not have the responsibilities of a seller

3. Secured Credit

In this form, the financier advances money on the security of appropriate collateral. The collateral may be in the form of personal or real assets. If the customer makes default in payments, the financier has the right to appropriate the collateral. This kind of consumer credit is called secured consumer credit.

4. Unsecured Credit

When financier advances fund without any security, such advances are called unsecured consumer credit. This type of credit is granted only to reputed customers.

5. Fixed Credit

In this form of financing, finance is made available to the customer as term loan for a fixed period of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the examples.

Advantages of Consumer Finance

1. Compulsory Savings

Consumer credit promotes compulsory savings habit among the people. To make periodical installments knowingly or unknowingly, people cut short their other expenditures and save. These savings ultimately fetch them ownership of an asset in course of time. Thus consumer credit adds to the savings habit of people.

2. Convenience

Considering the nature and type of customers, consumer credit facility offers schemes to the convenience and satisfaction of the customers. Walk in and drive out, pay as you earn, everything at the door step, one time processing etc. are examples.

3. Emergencies

Consumer credit facility is available to meet personal requirements like family requirements, festival requirements, emergencies etc. The credit facility is not strictly restricted to purchasing of consumer durables alone. In ordinary course of life people come across number of urgent financial requirements, for which consumer credit offers a better solution.

4. Assists to Meet Targets

In all business activities, there will be targets to be achieved by the executives. Most people abstain/ postpone purchasing for want of sufficient fund. When the dealer themselves arrange for fund people get attracted and purchase take place in large quantity. Thus it assists to meet sales targets and profit targets.

5. Assists to Make Dreams to Reality

A car, a TV, a washing machine, a computer, a laptop, a mobile phone, etc. is undoubtedly a dream of an average human being. But people may not purchase because of fund problem. In those cases consumer credit facilitates an opportunity to possess and own those dreams on convenient terms.

6. Enhances Living Standard

Consumer credit enhances living standard of the people by providing latest articles and amenities at reasonable and affordable terms.

7. Accelerates Industrial Investments

Demand for consumer durables enhances further investment in the consumer durables industry. Thus provides more and more employment opportunities in the country.

8. Promotes Economic Development

Demand for consumer durables, further investments in consumer durables industry, increased living standard of people, improved employment opportunities and income etc. improves economic development of the country.

9. Economies of Large Scale Production

Increased demand leads to large scale production. Large scale operations lead to the economies of large scale operation. This in turn leads to lower prices.

10. National Importance

Consumer credit is of national importance in India. Unless there is such a convenient mode of financing, total demand for consumer durables will be far lesser. Poor demand lead to lower production, which in turn lead to poor employment opportunity and lower income level. All these finally land the economy in trouble.

Disadvantages of Consumer Finance

Following are the disadvantages of consumer finance:

1. Promotes Blind Buying

Facility to purchase at somebody else’s money tempts people to buy and buy goods blindly. This may land these people to debt trap within a short while.

2. Leads to Insolvency

Blind buying of goods make these people insolvent/bankrupt within a shorter span of time. This ultimately spoils their life in the long run.

3. Consumer Credit is Costlier

Along with the convenience that it offers it charge the customer for all these conveniences offered. Thus it becomes costlier when compared to other forms of finance.

4. Artificial Boom

The economic development posed by the impact of consumer credit is not real but artificial. Economy will take years to stabilize the artificial boom claimed by the proponents of consumer credit.

5. Bad Debts Risk

By whatever name called credit is always risky so is the case with consumer credit as well. Defaults are a major threat to consumer credit. Once there is a default, repossession and other legal formalities are difficult.

6. Causes Economic Instability

Artificial boom and depression leads to economic instability and causes chaos in the economic progress. It will be difficult for the real ordinary business man to identify real progress and artificial progress.