Consumer Credit: Advantages

and Disadvantages, Sources

and Costs
Group 5
PATULOT, Aira Kathwin C.
ESPIRITU Louis Angelo
MARQUEZ, Mary Grace
RIVERA, Marvin Hernandez
What is Consumer Credit?
• Credit is an arrangement to
receive cash, goods or services
now, and pay for them in the
future.

• Consumer credit is the use of

credit for personal needs,
except a home mortgage, by
individuals and families.
Advantages and Disadvantages of Consumer Credit
ADVANTAGES
 Permits purchase even
when funds are low.
 A cushion for financial
emergencies.
 Advance notice of
sales.
 Easier to return
merchandise.
 Convenient when
shopping.
 One monthly payment.
 Safer than cash.
DISADVANTAGES
 Temptation to
overspend.
 Can create long-term
financial problems and
slow progress toward
financial goals.
 Potential loss of
merchandise due to
late or non-payment.
 Ties up future income.
 Credit costs money -
Types and Sources of Consumer Credit
Types of Consumer Credit
 Closed-End Credit
-One-time loans for a specific purpose that you pay back in a specified period of
time, and in payments of equal amounts.
Example of Closed-End Credit
-Mortgage, automobile, and installment loans for furniture, appliances and
electronics.
 Types of Consumer
Credit

 Open-End Credit.
Use as needed until reaching line
of credit max.
You pay interest and finance
charges if you do not pay the bill
in full when due also called
revolving check credit
 Example of Open-End Credit
Credit cards, departments store
cards, and home equity loans.
Sources of Consumer Credit
• Commercial Banks
-Commercial banks make loans to
borrowers who have the capacity to
repay them. Loans are the sale of the
use of money by those who have it
(banks) to those who want it
(borrowers) and are willing to pay a
price (interest) for it.

• Savings and Loan Associations (S&Ls)

savings and loan associations used to
specialize in long-term mortgage loans
on houses and other real estate. 
● INDIVIDUAL MONEY LENDERS
● Individual money lender who may lend
his surplus to those in need so that it will
bring some income to him. No collateral
is required on the part of borrowers to
secure the loan of whatever sum money.
● Family and Friends
-Your relatives can sometimes be your best
source of credit. However, all such
transactions should be treated in a
businesslike manner otherwise,
misunderstandings may develop that can
ruin family ties and friendships.
• Pawnbrokers
Recently made famous by reality shows, pawnbrokers are unconventional,
but common, sources of secured loans. They hold your property and lend
you a portion of its value. If you repay the loan and the interest on time,
you get your property back.
Determine whether a loan will be extended
and how to apply for a credit
• Before you take out a loan, ask yourself...
• Can you afford the loan?
• What do you plan to give up in order to make the
payment?
Apply for a Credit
Applying for a Credit: The 5C’s of Credit

Character - Character is the most important consideration in the proper

determination of the credit rating of an individual.Do you pay bills on time?

Capacity - As a basis of credit, capacity signifies the ability to pay when a

debt is due. Can you repay the loan?

Capital - credit represents the financial strength of the risk, that is, it
consists of the amount and quality of goods and property, expressed in terms
of money, which an individual or firm possesses over and above, his
financial obligations. What are your assets and net worth?
Collateral - Creditors, as a general rule, would prefer
loans or credits to be backed up by collaterals as much
as are necessary for their self -protection. What do you
have of value that you pledge to the lender that they
can repossess if you fail to honor the terms of the
agreement?
Credit History- Lenders will review your credit history
to find out whether you have used credit responsibly in
the past.
Calculating the Cost of Credit
• The Cost of Credit
 Interest
-Is the monetary charge for the privilege of borrowing money.
-Is the amout of money a lender receives for lending out money.

Simple interest.
Formula: I = P x r x T
Raymond bought a car for $40, 000. He took a $20,000 loan
from a bank at an interest rate of 13% per year for a 3-year
period. What is the total amount (interest and loan) that he
would have to pay the bank at the end of 3 years?

I = 20,000 × 13% × 3
I =7,800

$20,000 + $7,800 = $27,800

Compound Interest
• Compound interest is the addition
of interest to the principal sum of a
loan or deposit, or in other words,
interest on interest.
 
N= Monthly (12 times)
Quarterly (4 times)
Semi Annually (2 times)
Annually (1 time)
Example:
Take a three-year loan of $10,000 at an
interest rate of 5% that compounds annually.
What would be the amount of interest? In
this case, it would be:
A= $10,000(1+
A=$11,576.25
I= $10,000- $11576.25 = $1,576.25
Protect and Manage Credit
• Pay back your debts on time.
• Apply for new credit only when you need it. 
• Don’t co-sign.
• Consider keeping starter cards open.
• Guard your personal information. 
• Regularly monitor all your accounts
• Stay diligent.
Thank You!
Group 5
PATULOT, Aira Kathwin C.
ESPIRITU Louis Angelo
MARQUEZ, Mary Grace
RIVERA, Marvin Hernandez
Sources:
• https://slideplayer.com/slide/1533319/
• https://www.wolterskluwer.com/en/expert-insights/understanding-the-ty
pes-and-sources-of-consumer-credit
• https://www.onlinemathlearning.com/simple-interest-formula.html
• https://midwestcommunity.org/7-ways-to-protect-your-credit-score/
• https://www.investopedia.com/terms/c/compoundinterest.asp