Posted in Marketing and Strategy Terms, Total Reads: 262
Definition: Consumer Credit
First of all, let us understand what we mean by credit. Credit is a way to buy goods, services or cash at a point of time with a promise to pay for them in future. Consumer credit therefore is a type of credit used by customers to buy non-investment goods and services for personal use. The value of these goods and services depreciate with time.
There are three ways in which a consumer can fund its current purchases: -
• Use his past savings
• Use his current earnings
• Borrow money against its future sources of income
Broadly there are three types of credit: -
a) Non Instalment Credit: - It can be either secured or unsecured depending upon the source of credit. A person doesn’t have to pay monthly payments of a fixed amount, but instead the entire payment is due in a lump sum at a definite point of time in near future. The time for which the credit is offered is short, like a month or so.
b) Instalment Closed-End Credit: - This type of credit allows a customer to receive an amount to make a purchase of only one or few goods. The credit cannot exceed the price of the good. Also, the payment is redeemed in monthly instalments over a period of time. Example: - Car loan, mortgage loans, etc.
c) Revolving Open-End Credit: - The consumer is offered with a credit which he decides to use or not over a definite period of time and if used he/she has to pay that used portion of the credit at the end of one month. The credit is known as open end because it does not close till the company offering the credit closes the account. Example: - Credit card, departmental store membership card, bank overdraft, home equity loan, etc.
Advantages of using consumer credit: -
• Easy and current use of goods and services.
• Facilitates financial stability.
• Helpful in case of financial emergencies.
• Makes shopping more convenient.
• It is safer than cash.
Disadvantages of using consumer credit: -
• It is expensive.
• It tempts the consumer to overspend.
• It increases the financial debt.
• There is a chance of losing upon the goods or service in case of delayed payments.