Have you ever taken on some personal debt to purchase goods or services? If you have, then the amount of money that you took out is called consumer credit. Consumer credit should not be confused by personal loan. Unlike personal loan, consumer credit is simply unsecured debt that you take in order to purchase everyday goods and services.
However, in some cases, especially involving large amounts of money, consumer credit can be accompanied by collateral such as mortgage and car loans. Consumer credit can also be referred to as consumer debt.
Types of consumer credit
There are two types of consumer debt. They include:
Revolving consumer credit
This type of consumer credit approves the consumer for a specified amount of credit that they can use whenever they need it. Revolving consumer credit functions like a credit card. The open line of credit can be utilized by the consumer several times until the maximum limit offered by the lender is depleted.
With revolving consumer credit, you will be required to make minimum payments in order to maintain the open line of credit. Revolving credit is unsecured debt, and as such, it tends to attract a high rate of interest.
The remaining amount of debt after you make minimum payments will attract more interest every month the credit remains open.
On the other hand, instalment credit involves you paying a specified amount of payment over a specified period of time until the debt is cleared.
In most cases, installment credit is issued under specific purposes such as purchasing a piece of furniture, home appliances, and vehicles among others.
Unlike revolving credit, installment credit attracts very low interest because it is secured debt. The goods purchased under installment credit serve as collateral in case the consumer fails to pay.
Non installment credit
Non installment credit can be unsecured debt or secured debt depending on the type of company offering the credit.
Unlike installment credit, no instalment credit does not have fixed payments over a period of time. Instead, you will be required to pay the complete loan all at once in lump sum. Due to this nature of payment, non-installment credit tends to be due in a short period of time such as a month.
Consumer credit and economy
Economists use consumer credit to measure the portion of an individual’s or family’s spending that goes to services and goods that depreciate fast. As such, consumer credit mainly includes:
- Discretionary purchases such as dry cleaning and cosmetic services
The monthly sue of consumer credit is closely measured by economic experts as an indicator of economic contraction or growth.
If majority of consumers who are willing to borrow consumer credit are confident that they can pay it back o time the economy experiences a boost. However, if consumers decrease their spending by borrowing less consumer credit, or not borrowing at all, the economy contracts. Economic experts take this move as an indication that consumers are concerned about their financial stability in the future.
As we have discussed above, consumer credit allows consumers to purchase goods and services immediately, then pay back the costs over time. Due to the flexibility of consumer credit, it offers a lot of benefits to the consumer. But is there any downside of consumer credit? Let us look at the advantages and disadvantages of consumer credit to determine whether it is worth the shot.
Advantages of consumer credit
Consumer credit clearly provides you with financial flexibility because it allows you to purchase goods and services immediately you are in need of them. In the past, people had to save money for years so that they could afford to buy what they wanted. The flexibility that consumer credit provides allows you to spread the costs over a period of years or months, without affecting your daily needs.
The credit also allows you to make quick investments or handle financial emergencies as they come. If the roof of your home gets damaged overnight by a storm, you can use consumer credit to get it fixed immediately. Without the credit, you may be forced to save money for months before you can afford to repair or replace your roof.
Rewards and perks
Did you know that you can earn a considerable amount of benefits if you use the credit wisely? Many stores especially departmental ones and car dealerships offer their customers great financial options such as:
- Delayed payments
- Low interest rates
Credit card companies also reward their clients with perks so that they can keep using the credit. Some of the rewards that credit card companies will give you include:
- Reward points
- Cashback offers
- Air miles
If you are able to pay back your consumer credit on time every time you borrow, all the perks and benefits given by the credit company amounts to free cash.
For instance, if you keep piling up air miles on your credit card, you could eventually have enough air miles to buy you a free vacation.
Disadvantages of consumer credit
Enticement to overspend
Although having quick access to credit is great for catering to basic needs and emergencies, having access to easy money can be very tempting. In some cases, you may find yourself buying expensive products and services that you do not really need.
If you have ever used credit to buy unnecessary pricey products, do not beat yourself up about it. It only means you are human. Psychologists have found that consumers overspend credit on unnecessary items because of natural human impulses.
An expert at Cornell University studied the shopping habits of 1000 households for more than six months. The expert discovered that consumers who used credit cards made more impulsive purchases on junk food and other miscellaneous items compared to people who paid cash.
The problem with impulsive spending is that it leaves you with high interest debt that is challenging o pay back.
High interest and penalties
Another reason why consumer credit is disadvantageous is the fact that the associated interest rates are so high, that you could end up paying back double the amount of credit that you borrowed. Most credit card companies will offer you low introductory interest rates in order to reel you in.
As you progress into a few months, the interest rates increase leaving you with no choice but to pay. In case you default payment, the credit companies will penalize you with even higher costs.
There is no denying that consumer credit is very useful to the average consumer. As such, we will not discourage you from obtaining consumer credit. However, ensure that you use consumer credit only when necessary, and always pay back the credit on time.