Consumer credit has grown significantly over the past years, most especially in industrialized countries. There has been an increase in the number of people who earn regular income in terms of salaries and fixed wages. Also, there has been a solid establishment of the mass market for durable consumer products. Consumer credit is a short or intermediate-term loan which is taken to fund the purchase of goods or services for personal consumption. It can as well be used to refinance debts incurred for such intents.
There are two major categories of consumer credit, also known as consumer loan: installment loans and non-installment loans . Installment loans are used to finance specific needs at a fixed amount for an established period of time. These types of loans are repayable in two or more installments. Examples of these loans are automobile loan, home repair and modernization loans, loans for consumer goods, personal loans, and credit card purchases. The non-installment loans are paid in a lump sum. Non-installment loans can be in the form of retail store charge accounts, single-payment loans by financial institutions, and service credit extended by doctors, hospitals, and utility companies.
Consumer credits usually come with higher finance charges than the cost of interest on business loans.
Consumer credits shows the amount in percentage of an individual or family’s expenses that goes to goods and services with fast depreciation. This includes necessities like cosmetics, food, clothing and many more. Economists closely measure consumer credit each month as it is used as an indicator for economic growth or contraction. When consumers take loans and are confident about paying their debts on time, the economy gets a boost. On the other hand, when the decide to cut back on their expenses, this sends a signal that causes the economy to contract.
Benefits of Consumer Credit
With consumer credits, consumers get an advance on income to purchase various products and services. This can be a lifesaver in the case of a car breakdown or other emergencies. Also, credit cards can be easily and safely carried around, which helps build a cashless society where people can rely on credit for small and significant purchases.
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Also, when the credits are being used wisely, consumers are rewarded with substantial benefits. Customers can get advantageous financing options, low interest rates and delayed payments, which are provided by many department stores and car dealerships. Credit cards offer rewards such as frequent flier miles, cash-back offers, and reward points that can be redeemed. Those who resist the urge to overspend and settle their credit accounts monthly, these rewards amount to free money. For example, you could enjoy a free vacation on a credit card with a frequent flier miles reward. However, in a situation where one fails to meet up with payments, there would be an increase in the interest rate.
Consumer credit provides financial flexibility. Unlike the days, where people have to save for a long period of time before the could get what they wanted, it is now very easy for several individuals to purchase items and spread costs over the course of months or years. This makes repayment less burdensome.
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