Consumer lending is a type of lending that offers credit payments or cash loans to individuals, households, and businesses for purchases such as homes, automobiles, education, or vacations. Lenders are typically banks, credit unions, and other commercial lending institutions. Consumer lenders offer loans with fixed interest rates, variable interest rates or variable-rate mortgages. Consumer loans are also called installment loans or retail installment contracts.
In the United States consumers borrow an amount of money that is similar to the amount they have available for spending on a credit card for a specific period of time with low or no fees attached if the consumer pays back what they owe in full at periodic intervals like monthly payments. These installments may be paid on an “as needed” basis (also known as revolving) or may be arranged in advance such that no monthly payments are required for up to five years (amortization).
Consumer loans can be secured (in which case the lender holds an asset – such as a lien on the property or vehicle, or registration of a motor vehicle – in exchange for an agreed upon interest rate) or unsecured (i.e., not backed by collateral). The terms of such loans are based on the borrower’s credit worthiness.
Often, consumer loans are provided by non-bank lenders including credit unions and finance companies, and can be packaged with other products such as auto leases. In recent years, some large commercial banks have started offering new consumer loans to help their customers deal with stagnating wages that have left many consumers struggling to repay higher-cost debt in today’s economy. In 2011 U.S. consumers owed $2 trillion on their credit cards, and another $937 billion in student loans for a total of $3 trillion in consumer debt according to the U.S. Census Bureau.
There is great concern about the rising level of consumer debt, which rose to $10 trillion by January 2010, a level not previously seen since just before the Great Depression in 1929. In the United States private student loans are considered consumer debt, though private student loan debt has surpassed that of credit card debt (making it the largest source of non-mortgage related household indebtedness). They accounted for more than 40% of all US personal loan outstanding balances and about 14% of total US non-housing related personal debt.(U.S. Census Bureau; 2009)
Consumer debt increased in the United States by more than 50% between 2003 and 2008, from $854bn to $1.3 trillion. This was attributed in large part to the subprime mortgage crisis, with lower income families and individuals being hit hardest by this increase, resulting in an estimated 40 million people having consumer loans. Since banks are the largest source of consumer lending (particularly unsecured lending), any regulatory move by most countries to limit banks’ activities may reduce the level of consumer lending that can occur. (Brown et al. 2009)
There are three major categories of consumer loan, which are:
Credit cards, also known as charge cards, offer consumers the opportunity to borrow money on a revolving basis for various purposes. The credit card issuer provides a line of credit that can be used regardless of whether there is any current obligation to pay. Because it is repaid in full and charged off by the end of the period it is borrowed for, this method provides an effective way for companies to use up their receivables inventory and reduce their inventory risk. For many years credit cards have been widely used in the United States and abroad; however, there are those who object to them.
It has been suggested that “… the credit card has proved to be a major contributing factor in the economic downfall of many individuals and families. Research shows that more than 90% of Americans who file for bankruptcy protection have credit card debt. Credit card debt is also cited as one of the leading causes for personal bankruptcy in Canada, Australia and the United Kingdom, as reported by The Chicago Tribune.
Some students and adults see credit cards as a convenient method to make everyday purchases without having to carry cash or write checks, while others cite security concerns. Despite these potential drawbacks, consumer advocates see credit cards as an effective method for creating an optimal level of consumer spending; with enough incentives (such as rewards, etc.) it can help consumers become comfortable with using plastic money.
Many banks and credit unions offer loan products that make student loans more affordable in the United States. The U.S. Department of Education recommends these institutions for providing the highest quality financial assistance programs to help students pay for college debt and avoid default.
These loans offer a variety of options to meet their customers’ needs, such as the ability to choose a repayment plan that fits their situation, depending on how long they want to be making payments, and whether they have been employed while going to school or are not even sure they will be able to get a job after graduating.