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Why is the level of consumer credit of concern to policymakers? What loans are included in...

Why is the level of consumer credit of concern to policymakers?

What loans are included in Consumer Credit?

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Expert Solution

Credit – means Buy Now Pay Later
Consumer Credit – Credit for Personal Use

In general Consumer Credit refers to, short- and intermediate-term loans used to finance the purchase of commodities or services for personal consumption or to refinance debts incurred for such purposes. It is not usually used to describe investment in Property like house etc as it would require secured mortgage loans. The most common example is the Credit Card.

Why is the level of consumer credit of concern to policymakers?
•   The level of Consumer Credit is one the most important factors to be considered by the policymakers while granting the credit to any person or fixing the amount of interest or late fees to be charged from that person.
•   A consumer who is good in repaying his debts timely and has no default history is preferred to be given loan over person who always pays his debts after due date. The Income generation capacity, security of income for reasonable period or for the loan duration is also considered.
•   The credit score of a person factors in different aspects like Payment History, Amount of Debt, Credit History. You can remember the 4 C’s of Credit – Character, Collateral, Credit Score and Capacity.
•   Policymakers have to factor whether the loan given will be recovered along with the probabilities of it turning into a bad loan. Thus, person who has a low level of Consumer Credit score will find it more difficult to get the loan and will have to shell out extra premium for these services.


What loans are included in Consumer Credit?
The Consumer Credit is primarily of 2 types –
1.   Revolving Credit - The credit card is the best example of revolving credit. It is basically an arrangement which allows the loan amount to be withdrawn, repaid and redrawn until the arrangement is in place. Supposing you have a credit with limit of say 10,000 $ then you can withdraw any amount at any specific time from it and can repay it again to reset it back to 10,000 $ at any time. However, since there has to be an arrangement for having a credit card with a credit giving agency therefore it also includes certain time frames to pay back the amount to avoid interest and late payment charges.
2.   Instalment Credit - Instalment credit is used for a specific purpose and is issued at a defined amount for a set period of time. Payments are usually made monthly/quarterly in equal instalments. Instalment credit is used for purchases such as of major appliances, cars, and furniture. It can be either Secured or Unsecured credit meaning that can be with or without any security.


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