Consumer finance is the aspect of personal finance that concerns with lending directly to consumers. It is the inverse of investing in the personal finance universe. In this regard, consumer finance usually means extending cash loans for either personal, family or household expenses. These loans are good for only 60 days or less and require a single full repayment on maturity date. Another type of consumer financing are “title” loans which are secured by the title or registration or proof of ownership documents of certain big-ticket items such as a motor vehicle, recreational vehicle, sailboat, travel trailer or other movable or fixed asset. Title loans are similar to cash loans (also called as “payday” loans) since cash is given directly upon loan release for the borrowers to spend as they wish as long as it is not intended to be used as “purchase” money. They are also good for only 60 days or less and likewise repayable with a single payment.
Anything of bigger amounts and a considerably longer loan term is considered as real consumer finance. Falling under this type are car loans and home loans (both first and second mortgages). On the other hand, credit cards are also part of consumer finance but with slightly different characteristics than other forms of consumer finance. A credit card is different in that it is the near-equivalent of a perpetual loan; if a card holder pays only the minimum amount per month, then the principal amount is “revolved” and theoretically “extends” forever.
Originally, consumer finance firms or companies were standalone businesses. They were not connected to any large bank or some other financial institution. These consumer finance firms were businesses in themselves and were financed by the capital of their owners. An alternative to banks, these firms often offer collateral-free loans but at significantly higher interest rates to compensate for the increased risk. An unsecured loan is heaven sent to people who need money badly but cannot borrow from a bank due to bad or poor credit records. But as the industry and the economy grew, more financial services firms (such as banks and insurance companies) entered the picture and also began to offer consumer credits on a larger scale. In the U.S. this industry grew so large that it contributes approximately two-thirds to the gross domestic product. Most other countries also have significant portions of their economy dependent on consumer-led consumption. A rise in interest rates or a slowdown in consumer spending impacts an economy adversely. Any prospective borrower should do these steps before plunging and taking out a consumer loan:
- -Learn the advantages (pros) and caveats (cons) of financing.
- -Research and compare various consumer finance companies.
- -Read up and fully understand all consumer finance information.
http://www.ftc.gov/reports/Fraud/finance.shtm
- Home Loans
Home mortgage is the largest component of consumer finance in almost all free-market economies. Housing loans typically have very long repayment terms that sometimes extend up to 30 years. This is understandable since housing loans are structured to be repaid during the lifetime of the borrower-prospective homeowner. Interest rates on these home loans can either be fixed, variable, or adjustable. Features are sometimes added to standard home loan terms and conditions to protect the homeowner-borrower from deceptive or predatory lending practices. Most governments provide their borrowers with safeguards such as caps on the maximum rate that can be charged, lifetime caps, and payment caps (limit on monthly payments in absolute amounts).
http://www.federalreserve.gov/releases/g19/current/default.htm
Most banks likewise offer reverse mortgages when the same home borrowers reach a certain age (usually senior citizens 62 or above). It is used to release or monetize the home equity portion of a residential property in one lump-sum or series of multiple payments. In this case, the senior citizen-borrower makes no monthly payments whatsoever. The homeowner/s’ (if there are several family members, then the loan is based on the age of the youngest member) payment obligations are deferred until the home is sold, the owner/s leave (moves into a home for the aged) or the owner/s dies (always based on the youngest). This loan is meant to let home borrowers enjoy the benefits of their savings during their twilight years. The loan proceeds can be spent in anyway they wish such as take a vacation, take a luxury cruise or take a round the-world tour. They can also re-invest the money into higher-yielding financial instruments or invest in new business undertakings.
http://www.hud.gov/buying/reverse.cfm
- Car Loans
The second largest component of consumer finance after housing loans are car loans. Modern lifestyles demand that a person who can afford to own a car get one for himself. Car loans are very easy to obtain in most countries as long as you can show documentary evidence about your paying capacity such as payslips or income tax return filings. It is considered as a chattel mortgage and requires a number of different types of insurance coverages. These loans are also termed as auto loans and typically have a maturity period of between 3 to 5 years depending on the borrower’s preference. This is also the maximum useful life when accounting for chattels like a car after which it has zero book value.
However, most cars definitely last longer than 5 years. Finance companies even offer financing for used cars. Most banks also offer auto loans as part of their retail banking activities and use an add-on rate to compute for amortizations. Big car manufacturers such as Ford, General Motors, Toyota, Honda, Nissan and other makers offer help to their car buyers by establishing leasing and financing companies as subsidiaries. Prospective car owners can also apply for consumer financing (car loans) at specialized lending firms that offer loans for second-hand units.
http://www.carcredit.com/car-buying-vs-leasing.asp
- Personal Loans
These are consumer loans which are granted on the mere basis of a borrower’s good credit history and his presumed ability to repay the loan from personal income sources such as salary income. These are typically unsecured (no collateral) loans which are termed as “signature loans” but requires a co-maker or co-signor as a loan guarantor who will pay off the loan in case the borrower defaults. A personal loan is a debt that was incurred primarily for consumption rather than for investment purposes (business and commercial). It will include such common expenditures as medical expenses, family expenses (education, vacations, weddings, etc) and home expenses like repairs, renovations and extensions. It also includes purchases like buying a personal computer, an air-con, or a refrigerator for personal or home use.
There are many types of personal loans such as payday loans (also termed as cash advance loans), debt consolidation loans and loans specifically designed for those with bad credit histories. Newer loans are called “practice” loans which are extended to certain professionals such as lawyers, doctors, dentists, veterinarians, and accountants. These loans are very expensive when you actually compute for the interest that you pay because these are compounded. For example, a payday loan of US$1,000 repaid in 30 bi-monthly payments (15 months) will have an annual percentage rate (APR) of about 220%. Lenders charge higher rates because of increased risks. Personal loans are unsecured and there is no collateral for the lender to fall back on in case of payment default. These consumer or personal finance loans, especially the payday loans, can be considered to be derived from the earlier “loan-shark” practices of charging very high interest and offering a credit product that traps debtors or borrowers.
http://curiouscat.com/invest/personalloan.cfm
- Credit Cards
The original idea of using a credit card was first described by the author Edward Bellamy in his novel “Looking Backward” in 1887. It has come a very long way since then and is considered a way of life for most people. Modern life amenities (some call it necessities) will typically include a cellphone, own car, and a number of credit cards. These are things we cannot seem to do without and many people say they feel helpless without them. The concept of credit cards as they are understood and used today came into being with the first Diners credit card – an all-purpose credit card used to pay merchant partners of the card issuers when cardholders make a purchase.
Credit cards are a form of personal finance and constitute credit that is unsecured. Card issuers, mostly banks nowadays, extend to their cardholders credit (effectively a loan) by setting a credit limit for each account holder. Credit cards are a great source of profits for issuing banks because of high interest rates and other fees that they tack onto the usage of credit cards. Banks only earn when cardholders “revolve” or carry over their principal card balances to the next month and are charged interest for it. So banks naturally go after these “revolvers” - people who make only the minimum payments and carry the outstanding balance to the next month. What banks avoid are so-called “deadbeat” who are card holders that pay off their entire outstanding card balance on due dates and therefore pay no interest on the credit they had used. Free money!
People had been using their credit cards to finance almost all the things they want to buy now using rather than saving up for it and pay in cash. Many economists have questioned the wisdom or utility of credit cards in the whole economy arguing that practices like credit cards extensively can often lead to distortions and even to unproductive speculative buying sprees rather than investments. Some finance experts now sound the warning that the next bubble to burst will be an implosion in the credit card industry where many cardholders are now overextended. These people maintain balances way beyond their paying capacities and a slight downturn could turn these cardholders into default with wide-ranging effects on banks and other financial institutions. After what happened when the U.S. housing market collapsed due to “sub-prime” mortgages, most of the banks are now taking pre-emptive action by drastically reducing the credit limits of their cardholders including those who always pay on time. These banks are now looking at certain industries and occupations as high-risks despite a card holder’s good payment history. An example of this practice is cited at this site:
http://finance.yahoo.com/banking-budgeting/article/105283/Card-Issuers-Get-Personal-to-Check-Credit
This companion site gives an analysis of what is in the U.K. now:
http://www.iht.com/articles/2008/06/24/business/col25.php