Reviewed by Aug 27, 2020| Updated on
What is Consumer Credit?
Consumer credit often referred to as consumer debt is the debt taken by an individual to buy goods and services. Consumer credit can be in the form of a credit card or any type of personal loan.
Understanding Consumer Credit
In simple words, consumer credit is the term used to define an unsecured debt that was taken to purchase goods and services. However, debts taken for the purchase of a plot or house are not included under consumer credit.
Consumer credits are generally offered by financial institutions or banks to help customers buy everyday goods and services at any instant. In return, the consumers are charged interest over the time taken to repay the debt.
Classification of Consumer Credit
Consumer credit can be classified into two types—revolving credit and instalment credit.
*Revolving Credit: * It is also referred to as the revolving line of credit. It offers customers an open line of credit, which can be utilised to deplete the maximum limit offered by the lender repeatedly.
Consumers will be required to repay the minimum prescribed payments regularly to keep the line of credit open. However, since the revolving credit is an unsecured debt, it generally attracts a comparatively higher rate of interest.
The remaining debt after making the minimum payments will attract interest with every month the line of credit is available.
Instalment Credit: This type of credit is generally issued in the case of specific purposes. They can be the purchase of furniture, vehicle, or home appliances, among others.
In the case of instalment credit, the payments are made in the form of equated monthly instalments for a predefined period. Unlike the revolving credit, instalment credit attracts a lower rate of interest as it is a secured debt. Here, the goods purchased serves as collateral if the consumer defaults on repayment.