Consumer Credit

Unit 3
Credit
 It is a means of borrowing money from a
person or a company and returning it at a
later date, usually with additional interest
charged on the original loan.
Increased usage of consumer credit
 There is an accepted idea that we can have
what we want today and pay for it later.
 Interest rate on credit cards and other

sources of credit are attractively low.

 There is an increased amount of advertising

to the customers about the credit offer.

 The increase in Internet purchasing.
 Increase cost of leaving such as housing and

rental costs.
Advantages to buyer of using credit

 Instant purchase.
 Convenient.
 Credit cards are secured.(PIN)
Disadvantages to buyer of using
credit

 High rate of interest for the defaulters.

 Expensive than paying in cash.
 Difficulties to repay.
 Defaulters may become ‘Blacklisted’.
 Stops private individuals from investing.
Advantages to seller of offering
credit
 A fast flow of money.
 Increase impulse buying.
 Convenient for overseas customers.
 Increase sales.
 For some types of credit retailers receives

commission.
Disadvantages to seller of offering
credit

 Credit card frauds are increasing.

 Offering credit can be expensive.
Types of credit

 Hire Purchase
 Extended credit ( Deferred payment)
 Credit Cards
 Store Cards
Hire Purchase
 It is an agreement signed between the
customer (or buyer) and the financier of the
hire purchase facility, where by the customer
agrees to-
◦ Hire the goods
◦ Pay a fixed number of installments (normally
monthly) of an agreed amount over a stated period.
Features
 Customers use hire purchase to buy
expensive items and pay for them over a long
period of time.
 The items remains the property of the seller

or financier until the last installment

payment.
 The total cost of repayment usually much

more than the original cost of the product.

Features

 The customer gets to use the product

immediately.
 Hire purchase is suitable for capital goods

which have good second hand value. Ex: cars

house, motor bike etc.
Advantages
 It spreads the cost of expensive items over a long
period of time.
 Repayments are decided at the beginning of the
agreement and will not go up or down.
 Customers are enable to buy the product that
they might not normally be able to afford.
 The ownership transfers after the last installment.
 If the item becomes out of date, the customer
may choose not to make the final payment and
return the item to the hirer.
Disadvantages
 If payments are not made, the hiring organization
may repossess the items and all the earlier
payments will be lost.
 During the hire purchase period the item may
become out of date or worthless.
 Encourage the customers to spend their future
income.
 It is more expensive than paying in cash.
 Hire purchase items are usually priced very
highly.
Extended credit ( Deferred payment)
 An extended credit is an actual sale.
 Payments are made over a period of time

however, with extended credit the buyer may

not have to start making payments
immediately after receiving the goods.
Extended credit ( Deferred payment)

 The item becomes the property of the

purchaser straight away and not on the final
payment.
 This suitable for consumer goods which have

no second hand value. Ex: Watches, clothes,

furniture etc.
Advantages

 The item purchased will not be repossessed if

payments are missed or delayed.
 The items belong to the purchaser right away
Disadvantages

 If repayments are not made the purchaser

may be taken to court to demand payment of
the outstanding amount on the agreement.
 Purchaser cannot end their agreement and

return the item.

 Interest rates are usually very high and

expensive to the purchaser.

Credit Cards
Credit Cards
 It helps us to buy products immediately and
pay for it later.
 Each card holder can spend up to a limit

agreed with the lender.

 Each card has a PIN which is usually four

digits long. It known as ‘Chip and PIN’

 Each card has a computer chip in it.
Credit Cards
 The card holder receives monthly statements
from the card company.
 The card holder has to pay a minimum

payment
 If they do not pay the full amount on their

card, interest is charged on the balance left

on the card, increasing the amount of money
that is owed.
Advantages
 It is easy to purchase high-value products.
 It is safer to carry.
 If the balance at the end of the month is paid

then no interest is charged.

 Credit companies may give their card holders

‘rewards’ or money back to encourage them

to use their cards more often.
Disadvantages
 Credit cards charge a high rate of interest
compared with other credit methods like
bank loans.
 It is easy to encourage card holders to spend

more, which can result both high repayments

and interest being charged.
Store cards
 Store cards are very similar to credit cards
but card holders can only use them in the
stores which give them.
Advantages
 If we pay off our card balance at the end of
the month we can have free credit and avoid
interest charges.
 We may receive special store discounts not

available for others.

Disadvantages
 Annual percentage rates of interest are
usually extremely high.
 Stores regularly try to encourage card holders

to purchase more by sending exclusive

information about sales by e-mail or post.
 Different offers encourage the customers to

spend more at the store that gave the card

rather looking for cheaper alternatives.