The availability of credit provides much-needed flexibility to people when spending huge sums. It saves you from making upfront payments in full and preserves your bank balance which you can then use to settle the credit in installments. That is why consumer credit is so important. It enables consumers to spend on products and services more freely. So, let us learn in detail about what is consumer credit, its types, and benefits and drawbacks.
What Is Consumer Credit?
Consumer credit, also called consumer debt, is credit consumers avail to purchase goods and services and defer debt repayment over time. The credit can be either in the form of personal loans, a credit card, or secured and unsecured loans.
Financial institutions, NBFCs, CBFCs, credit unions, and retailers extend consumer credit to individuals to help them pay for their purchases. These lenders charge interest that consumers of credit must repay along with the principal amount within the stipulated repayment tenure.
Now that you know consumer credit’s meaning, let us see its different types.
What Are Consumer Credit Types?
When it comes to types of consumer credit, consumers can avail of two types of credit – Installment Credit and Revolving Credit.
1. Installment Credit
Lenders extend installment credit for a particular purpose, like purchasing a vehicle, appliance, property, etc. The credit is available at a predetermined amount for a specific period and paid in installments of equal amounts. The product purchased acts as collateral, so interest rates are usually lower than revolving credit. However, lenders get a level of ownership over the goods until the debt has been paid in full.
2. Revolving Credit
Consumers of credit can use revolving credit to finance the purchase of any good or service. The revolving credit provides an open line of credit and requires no collateral. Borrowers can repeatedly use the maximum credit limit as long as they pay the minimum monthly payment. The remaining loan amount attracts interest for every month the line of credit is available. Since this type of consumer credit is unsecured, lenders charge higher interest rates than installment credit.
What Are the Advantages of Consumer Credit?
1. Improved Purchasing Power
People with limited income often cut back on their expenses to save before they can purchase big-ticket items. However, with consumer debt, you can take a loan to pay for the product in full upfront and then repay the loan amount in the form of installments.
Credit consumers do not need to carry huge cash or write a cheque when shopping. So, technically you do not even pay for a good or service out of your pocket. The loan provides you with additional funds, which you repay in smaller amounts over an extended period.
Lenders, especially credit card companies, offer special discounts and rewards to encourage people to avail of their credit services. The perks often include cashbacks, redeemable reward points, zero-cost financing, etc.
What Are the Disadvantages of Consumer Credit?
1. Inflated Product Cost
Consumer debt provides consumerswith easy credit to pay for their purchases in full upfront, but it also makes the product more expensive. When you buy a product without availing of credit, you pay only the sticker price. However, when you avail of credit, you also have to pay interest, which makes the product’s final cost higher than its sticker price.
In case a borrower fails to pay off a monthly installment, it attracts additional interest, further adding to the product’s cost.
2. Risk of Accruing More Debt
Consumer debt, especially credit cards, provides consumers with easy credit. So, paying for every purchase through credit may be tempting. And if they fail to manage their installments, they may have more debt.
What Things To Keep In Mind When Availing Consumer Debt
- When using revolving credit through credit cards, keep the credit utilization to under 30%, i.e., if your credit card limit is Rs 1,00,000, try to use only Rs 30,000 in a month.
- When repaying the debt, try to pay your entire credit balance in full every month.
- Try to pay monthly installments in time without delay.
- The above three points make for a strong credit history and credit score, which lenders consider before sanctioning new customer credit finance.
Consumer credit is a convenient source of additional funds to purchase expensive products. It allows you to pay for your purchase in full upfront without exhausting your bank balance. If you have been postponing bringing home a big-ticket item, finance it with Tata Capital’s personal loan. These are multi-purpose loans available at the lowest interest rates and require no collateral or security to avail the loan amount. Visit the Tata Capital website to apply for personal loans online.