The Advantages, Types of Consumer Credit Anyone Can Easily Get And The Challenges That Come With Consumer Credit and How to Overcome Them
The concept of consumer credit is a business strategy that has slowly evolved over the years. In the past, there were unclear terms of establishing consumer credit. This is because many systems and businesses had no assurance of how they would get their money. This was after a good was purchased on credit.
Consumer credit involves the transaction of consumers buying goods and services on debt. The concept stands mostly for unsecured loans. The money used to pay for the product is paid in advance by other financial institutions like banks. Such loans are normally short term meaning customers are meant to pay back the loan within a period of maximum 30 days.
Importance of Consumer Credit
The function of consumer credit can effectively allow the economy to grow. This is because credit allows consumers to have the choice to buy goods at any time. Expensive items like cars and sale products can be bought with a loan and paid over time. Having access to available finances can be helpful during emergencies. Unforeseen financial shortages can be avoided through access to credit facilities.
Consumer credit also has the benefit of building a consumer’s credit report. It is the fastest way in which consumers can gain a favorable reputation with banks and even businesses. The ability to borrow and pay on time will generate high credit report scores.
Many governments are encouraging the concept of consumer credit. This is because of the increase of money circulation within the economy. The interests charged on the loans have assisted many businesses and financial institutions gain generous profits.
Types of Consumer Credit
There are various ways that consumer credit can be defined. It can be classified into different credits based on their use. It can also be defined based on whether it is secured or unsecured and through its means of payment.
Secured and Unsecured Credit
Consumer credit that is backed by a collateral is likened to be a secure consumer credit. Such credits are backed by the value of a consumer’s bank deposits, car or value of their home. In case of failure to pay, lenders can take the property in payment of the credit. Unsecured consumer credit is given mainly based on a consumer’s credit worthy nature. Such loans check on a consumers’ deposits and ability to pay back the loan. Oftentimes, such loans incur a heavier interest than the secure loans. This is because of the associated cost of risk.
Installment and Revolving Credit
Installment credit allows consumers to pay the loan back in installments. It enables consumers to spread out the payment over a period of time. Such loans are structured and calculated to ensure a specific amount of installment meant to be paid. Revolving credit involves transactions with credit cards. Such transactions give consumers access to credit based on the limit on their credit cards. The limit on the credit cards can be changed based on the consumer’s credibility. The main difference between revolving and instalment credit is that installment allows buying one specific item. Revolving credit involves a sum of money credited which a consumer can choose what item to buy.
This type of credit can be secured or unsecured. It is different from revolving and installment because it requires that it is paid fully. It does not require periodic set payments but rather payment of the exact amount borrowed.
Advantages of Consumer Credit
Consumer credit offers various benefits for people who use them responsibly.
Many credit companies tend to offer customers incentives to attract them into buying goods and products on credit. The benefits include special discounts on certain items and holidays and rewards for purchasing large items. Other benefits include hotel points and cashback rewards. Customers can take advantage of these benefits to save themselves some money.
The greatest advantage that arose from use of consumer credit is their flexibility. Consumer credit has enabled customers to buy products and services that they would not have previously afforded. Such items would have necessitated people to save for a long time to access them. It also allows consumers to provide for themselves more than enough time to pay for items. The cost of items can be spread over a longer period of time which makes it affordable to acquire the item faster.
Customer credit allows consumers to always have their cash in handy. It allows consumers to avoid the inconvenience of carrying around a lot of money while running errands. They can simply use pay through credit from their mobile phones and credit cards. It also works to provide money when emergencies arise like sudden car repairs.
Achievement of Life Goals
Consumer credit allows consumers to meet the needs that they would not have automatically met in real time. Large expenses such as buying a home or a car have become an achievable concept with consumer credit. For example, instead of saving up for a car, consumers can buy through credit. They can also structure their repayment to fit their lifestyle.
Another benefit is that it allows individuals to readily access funds from their own pockets. This removes the strain of having to borrow from friends or close family members. It also prevents borrowing from loan sharks in the case of emergencies. It preserves one’s reputation and maintains relationships without the strain of financial commitments.
Challenges of Consumer Credit
Irresponsible use of consumer credit can result in unwanted financial burdens. Consumer credit encourages spending on money that is normally not available. Individuals can end up having large debts that are too expensive to pay back. This can be worsened by the monthly or weekly interest rates that lenders charge to ensure that the transaction is profitable. Consumer credit also incur extra financial charges to the consumer. This is usually the fee associated with paying through credit.
Most times the financial charges may amount to almost half the amount being borrowed. This results in consumers paying a lot of finances for the loan. Lenders also add penalty charges for late repayment of the loan. Such expenses may become burdensome for consumers who may have not considered the total cost of paying through consumer credit.