What is a 'Consumer Credit'
Consumer credit is a debt that a person incurs when purchasing a good or service. Consumer credit includes purchases obtained with credit cards, lines of credit and some loans. Consumer credit is also known as consumer debt. Consumer credit is divided into two classifications: revolving credit and installment credit. The most common form of consumer credit is a credit card.
BREAKING DOWN 'Consumer Credit'
Economists and other financial analysts frequently measure consumer credit, which serves as an indicator of economic growth. For example, if consumers can easily borrow money and repay those debts on time, then the economy is stimulated resulting in economic growth.
Consumer credit is the portion of credit consumers use to buy non-investment services consumed or goods that depreciate quickly. This includes automobiles, education costs, recreational vehicles (RVs), boat and trailer loans, but it does not include debts obtained to purchase margin on investment accounts or real estate. For example, a mortgage loan is not consumer credit. However, the 65-inch high-definition television charged on a credit card is consumer credit.
Consumer credit allows consumers to get an advance or loan to spend money on products or services for family, household or personal uses repaid at a specified future date. Retailers, department stores, banks and other financial institutions offer consumer credit.
Advantages of Consumer Credit
The main advantage of consumer credit is that consumers can purchase goods and services and pay for them later. Consumers can purchase items they need when their funds are low. Consumer credit offers a backup form of payment and one monthly payment.
Disadvantages of Consumer Credit
The main disadvantage of using consumer credit is the cost. If a consumer fails to repay a loan or a credit card balance, this impacts his credit scores, affects terms and conditions, and results in late fees and penalties.
Types of Consumer Credit
Installment credit is used for a specific purpose, for a defined amount and for a specific period. Payments are usually the same amount each month. Examples of purchases made on installment credit include large appliances, automobiles and furniture. These kinds of loans usually offer lower interest rates than revolving credit. For example, a car company holds a lien on the car until the car loan is repaid. The total amount of the principal and interest is repaid within a predefined period. If the customer defaults on the loan payments, the company can repossess the car and charge penalties.
Revolving credit can be utilized for any purpose. Loans are made on a continuous basis for purchases until the consumer reaches his credit limit. Customers receive bills periodically to make at least a minimum monthly payment. For example, Visa can approve a consumer for a $5,000 credit card limit with a 13% interest rate. If the consumer defaults on payments, the credit card company can charge late fees or other penalties.