What is Consumer Lending
Consumer lending is the granting of loans by banks or other financial institutions to individuals and household consumers. It is granted basically for personal use and are usually categorized as unsecured loans. Consumer loans are granted based on the credit worthiness of the individual and there is no collateral attached to the loan, i.e. it is an unsecured loan. Consumer lending could be channeled to the purchase of a specific item or asset by individuals, this includes the purchase of a home (mortgage / home loan), purchase of a car for personal use (auto loans), purchase of a high end mobile phone on credit, and other of such facilities available to individual consumers.
Consumer loans like any other loan comes with interest payments, but unlike other business / corporate loans with a fixed interest rate and clearly defined financing terms, consumer loans interest rate, amount of credit available to the individual, and financing terms are usually determined by the credit rating of the applicant. This means that if an applicant has a good credit history, he would most likely get a lower financing cost unlike an applicant with a poor credit rating; this is because the bank has to be compensated for the additional risk it is taking by extending the loan facility to a consumer with a poor credit history.
Who uses Consumer Loans?
The two main categories of people that utilizes consumer lending are various individuals and Sole Proprietors. A loan can be taken by individuals to meet certain expenses such as medical expenses, school fees, asset purchase and so on. Most times, the pre requisite to granting a loan to an individual is that he or she attains the age of 18, and has a stable source of income. Before we look at why a sole proprietor can go through the consumer lending route rather than corporate lending, let’s take a look at what sole proprietorship is.
A sole proprietorship is a business entity run and managed by one natural person, characterized by lack of distinction between the business and the sole proprietor. This means that the sole proprietor has unlimited liability to the business; i.e in case of liquidation if the business is unable to pay off secured creditors, the sole proprietor is liable to pay off the creditors to the maximum value of his personal income and assets.
Some sole proprietors take up loans for their business through the consumer lending route because it is usually cheaper than corporate loans and does not involve the provision of a collateral before they can be granted the loan.
Major purposes individuals use Consumer Loans to purchase:
They are four major purposes people take loans for, they are:
- For the purchase of a vehicle (Auto Loans)
- For the purchase of a home (Home Loans)
- For payment of school fees (Student Loans)
- For any other personal reason (Personal Loans)
Auto Loans: Auto loan as the name implies are taken for the sole purpose of purchasing a car. Because of the usually high price of motor vehicles, most people usually seek the help of financial institutions to purchase that dream car. The borrower first approaches a lender or bank, fills out the required documentation, agrees with the interest rate, tenor of the loan and repayment schedule for the borrower to abide by. In the past most lenders required a down payment, but due to the competitive auto loan market of recent times, many lending companies are willing to wave down payments.
Home Loans: Home loans can be simply called mortgages, it is a loan advanced by banks or other financial institutions to an individual in order to assist the said individual in the purchase of a residential home. The lender in return gets a certain pre-agreed interest, and the promise of the borrower to payback both principal and interest within a certain time frame, else it could be repossessed by the lender.
Student Loans: Due of the high cost of education in western countries, it is more common for students to seek external financing for payment of their tuition fees. Aside tuition fees, student loans can also be employed to the payment of books and supplies and living expenses. In many developed countries, the government provides loans to students, for example in the United States the government has a federal student loan program.
Personal Loans: A personal loan is any other consumer loan collected for a specific purpose. It may be used for renovating your home, financing a holiday, consolidating debt, paying for a wedding and so on.