In: Finance
Why is the level of consumer credit of concern to policymakers?
What loans are included in Consumer Credit?
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arrangement which allows the loan amount to be withdrawn, repaid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.