Consumer Finance

Definition
The term consumer finance refers to the activities involved in granting credit to consumers to enable them
to possess goods meant for everyday use.
Business procedure through which the consumers purchase semi durable and durable goods other than
real estate in order to obtain a series of payments extending over a period of 3 months to 5 years.

Types of Consumer Credit
1. Revolving credit: it is an ongoing credit arrangement whereby the financier on a revolving basis
grants credit. The consumer is entitled to avail credit to the extent sanctioned as credit limit ex: Credit
Card
2. Fixed credit: it is like a term loan where by the financier provides loans for a fixed period of time.
The credit has to be repaid within a stipulated period ex: monthly installment loan, hire purchase.
3. Cash Loan: Under this type of credit banks and financial institutions provide money with which the
consumers buy goods for personal consumption here the lender and seller are different and lender
does not have the responsibility of seller.
4. Secured Finance: when the credit granted by financial institutions is secured by collateral it takes the
form of secured finance. The collateral is taken by the creditor in order to satisfy the debt in the event
of default by the borrower. The collateral may be in the form of personal property, real property or
liquid assets.
5. Unsecured Finance: When there is no security offered by the consumer against which money is
granted by financial institutions, it is called unsecured finance.

Sources of Consumer Finance
1. Traders: The predominant agencies that are involved in consumer finance are traders. They
include sales finance companies, hire purchase and other such financial institutions.
2. Commercial Banks: Commercial Banks provide finance for consumer durables. Banks lend large
sum of money at wholesale rate to commercial or sales finance companies, hire purchase concerns
and other such finance companies. Banks also provide consumers personal loans meant for
purchasing consumer durable goods.
3. Credit Card Institutions: These institutions arrange for credit purchase of consumer goods
through respective banks which issue the credit cards. The credit card system enables a person to
buy credit card services on credit. On presentation of credit card by the buyer, the seller prepares
copies of the sales voucher, one for seller, bank/credit card company and 3rd for the buyer. The
seller forwards a copy to the bank for collection. The sellers bank forwards all such bills to the
card issuing bank or company. The bank debits the amount to the customers account. The buyer
receives monthly statement from the card issuing bank or company and the amount is to be paid
within a period of 20 to 45 days without any additional charges.
4. (NBFCs): Non banking financial companies constitute an important source of consumer finance.
Consumer finance companies also known as small loan companies or personal finance companies
are non saving institutions whose prime assets constitute sale finance receivables, personal cash
loans, short and medium term receivables. These companies charge substantially higher rate of
interest than the market rates.
5. Credit Unions: A credit union is an association of people who agree to save their money together
and in turn provide loans to each other at a relatively lower rate of interest. These are caller co-
operative credit societies. They are non profit deposit taking and low cost credit institutions.