August 14, 2023

Understanding the Types of Consumer Credit

In order to understand the types of consumer credit, it is important to know what consumer credit is. It is simply an amount of credit used by individuals to buy products, such as goods and services and is used as an advance which is required to pay for the purchases. The purchase of goods and services involve housing loans, education, cars and many more. It is also referred to as a consumer debt. An individual repay the amount to credit card companies at a set future date so that the credit rating is not deteriorated. There are three types of consumer credit and before choosing the type of consumer credit, you should ask Your Personal Financial Mentor to guide you the suitable option. Following is an explanation of the three types of consumer credit:

Non-Installment Credit

Non-installment credit is offered for short term use usually for a period of one month and an individual is required to pay back the money before the expiry of credit period given to him. It is the simplest type of consumer credit among the three. An individual has to pay a lump sum amount of credit instead of making monthly payments of a specified figure. Depending on the company which is offering the credit, non-installment credit can also be secured or unsecured and is a good choice for those individuals who find it hard to make regular repayments after a fixed interval.

Installment Closed-End Credit

Installment closed-end credit is used for a defined time period and amount. This type of credit is for specific purposes and allows consumers to purchase a single item or a few commodities. Repayments on this type of consumer credit are usually made in equal installments. Installment closed-end credit is also called a non-revolving credit and in times of recession, the amount of this type of credit remains relatively same and does not decline.

The amount of goods and services purchased is paid in full along with the interest payment within a specified period of time. Mortgage loans, home loans, business loans and car loans are some of the good examples of installment closed-end credit. Companies and stores usually retain the title of goods and services sold until full payment is made because if a consumer defaults, a seller can repossess the property. The credit does not go beyond the sale price of a property and a person pays credit in installments instead of paying it back in lump sum amount.

Revolving Open-End Credit

Revolving open-end credit is a type of consumer credit typically found in most credit cards. This means that you are given a credit limit by credit card companies and a consumer must repay a part of credit at the end of a credit period. The payment consists of the amount actually borrowed plus the interest charge. The period is usually about one month and if an individual doesn’t pay the debt in full, a higher interest rate will be charged to him. A person has a specific amount of credit he or she can use or not use for different purchases. However, this type of consumer credit does not close until credit card companies offering the credit choose to close the account. This is what makes it a revolving credit as it usually doesn’t close. Revolving open-end credit is designed to be used repeatedly, with a predefined credit limit approved by credit card companies. Common examples of revolving-open end credit are credit cards and home-equity line of credit.

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