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Learning Objectives

To see the vital role played by consumers in supplying loanable funds through savings to the money and capital markets. To learn about the important role consumers play as major borrowers of funds and the laws that protect their rights. To explore the characteristics of consumer lending institutions.

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Introduction

Many financial analysts have referred to the period since World War II as the age of consumer finance.
- Individuals and families have become the principal source of loanable funds flowing into the financial markets today. - They also are one of the largest borrowing groups in the entire financial system.

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Consumers as Lenders of Funds

Consumers as a group are among the most important lenders of funds in the economy. Loanable funds are supplied by consumers individuals and families (households) when they purchase financial assets from other units in the economy.

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Financial Assets Purchased by Consumers

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Financial Assets Purchased by Consumers

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Recent Innovations in Consumer Savings Instruments

One of the most important trends affecting consumer savings and lending today is the explosion of new financial instruments. Many of these new instruments offer the consumer greater financial flexibility, as well as the potential for higher rates of return.

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Recent Innovations in Consumer Savings Instruments

Examples:
NOW accounts / share drafts automatic transfer services (ATS) share accounts at money market mutual funds consumer cash management services universal life insurance individual and Keogh Plan retirement accounts Roth and Education IRAs money market and market-index CDs variable-rate annuities and insurance plans

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21 - 8

Consumers as Borrowers of Funds

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Consumers as Borrowers of Funds

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Is Consumer Borrowing Excessive?

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Is Consumer Borrowing Excessive?

The concept of a household portfolio effect argues that consumers may alter their level of spending until they once again feel comfortable with the balance between their income, financial assets, and liabilities. On the other hand, the wealth effect causes many individuals and families to feel comfortable with heavier debt loads, believing they could sell off their higher-valued assets if trouble appeared on the horizon.

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Home Equity Loans

Like traditional home mortgages, a home equity loan is secured by a borrowers home. Unlike traditional home mortgages however, many home equity loans consist of a revolving credit line that the borrower can draw on for purchases of any goods or services.

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Consumer Lending Institutions

Leading Consumer Lending Institutions in the United States

Source: Board of Governors of the Federal Reserve System. *2004 figures are as of first quarter.
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Consumer Lending Institutions

Savings and loans and savings banks have long been dominant in residential mortgage lending, though they are also aggressively expanding their portfolios. The so-called fringe banks (such as check-cashing companies, title loan companies, payday lenders, pawn shops, and rent to own shops) lend primarily to distressed borrowers.

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Credit Scoring Techniques

Today, credit scoring techniques are used for a wide variety of loans and other financial services.
- Advanced statistical techniques are employed to assemble information about applicants for consumer loans, analyze the information gathered, and develop a numerical score. - Using that score, lenders can make a decision as to whether a borrower has scored high enough to qualify for a loan.

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Chapter Review

Introduction to Consumer Lending and Borrowing Consumers as Lenders of Funds

- Financial Assets Purchased by Consumers - Recent Innovations in Consumer Savings Instruments

Consumers as Borrowers of Funds

- Is Consumer Borrowing Excessive? - Categories of Consumer Borrowing

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Chapter Review

Home Equity Loans Credit and Debit Cards The Determinants of Consumer Borrowing Consumer Lending Institutions
- Commercial Banks - Finance Companies - Other Consumer Lending Institutions

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Chapter Review

Factors Considered in Making Consumer Loans Credit Scoring Techniques Financial Disclosure and Consumer Credit Credit Discrimination Laws Consumer Bankruptcy Laws

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