Sources of Consumer Credit
Credit occupies a prominent place in commercial affairs, undertaken by many people. It provides an opportunity to avail the benefit of purchases of goods and services, without giving the required money upfront.
A bank is a financial institution which is licensed by a government, and plays an important role in lending money. They also act as important players in financial markets and offer financial services like investment funds. Besides the credit cards provided by banks, which can be used for cash advances, many banks offer a variety of consumer credit services like loans with or without collateral, for major purchases such as automobiles and home mortgages.
They also provide credits for taking a vacation, investing in a business, paying off another loan, or a myriad of other purposes. These credits can be paid back to the bank in the form of installments. However, while giving credits, the banks are rather selective and look out for individuals and businesses with established consumer credit histories.
A brokerage firm deals in trading of stocks, and execute the purchase or sales of it. They are a useful source of consumer credit. The provision is for investors who have securities on deposit in a margin account and the maximum amount that can be used as credit, depends upon the market value of consumer’s securities.
Sometimes an additional collateral is required from the consumer’s side, if the value of securities in the account declines. Money borrowed against securities can be used for any of the purposes including investment in a business, or payment of another loan.
A credit union is a cooperative financial institution, that is owned and controlled by its members, to accept savings and grant loans to the other members. It is operated for the benefit of its members by promoting thrift, providing consumer credit at reasonable rates, and providing other financial services. Some credit unions help in community development and range from small voluntary organizations to bigger institutions.
People who qualify for membership in a credit union, are supposed to purchase its share, in order to activate their membership status, and gain benefits from the financial services which are offered. The operation of credit unions is almost similar to that of commercial banks, providing almost every type of consumer credit. The interest rates offered by credit unions may be slightly lower as compared to the commercial banks, however, the maximum loan amount may not be as large as provided by the latter.
Insurance, is a form of risk management, which is primarily used to hedge against the risk of a contingent loss. An insurance company is an entity which sells the insurance, whereas a policyholder is the one who buys it. Insurance companies are a source of credit for consumers, in case he owns policies that include a savings component, or cash value.
Life insurance loans carry relatively low interest rates as compared to that of loans from other lending institutions. Utilization of insurance companies as a credit source, actually involves borrowing one’s own money. Any outstanding loan amount is deducted from the policy’s death benefit, in case the policyholder dies without paying back his credits.
Consumer finance companies basically deal with making installment loans and second mortgages. They offer consumer loans and financing for all purposes, and are generally more willing to make relatively small loans which commercial banks frequently avoid. They can be beneficial for some people as they do not take deposits, and can approve loans for applicants with bad or no credit histories.
However, the interest rate charged by them are considerably higher and dependent on an individual’s credit file. If the applicant is having a bad credit profile, greater amount of collateral may be required by a finance company, for the approval of a loan.
Before approaching any of the above mentioned financial institutions for a credit, one should be sure of his needs, and should plan out the mode of repayment beforehand. It helps the consumer to avoid the hassles which occur on the non-repayment of credits, which may also spoil his credit history.