Introduction to Consumer Credit

Following are the 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:

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:

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.