Having a consumer finance department in a company helps both businesses and consumers.
Consumer financing is when a business offers financing benefits to their customers with a professional finance company’s help. This service allows the consumer to pay for goods and services that they can’t afford before via cash or credit cards.
Consumer financing companies (CFCs) are limited liability companies that give loans to the public. Most consumer finance companies work independently. Therefore, they do not associate with any other company.
There are many types of consumer loans available for people, which are as follows:
- Mortgages
- Credit cards
- Auto loans
- Students Loans
- Personal Loans
For getting qualified as a borrower, consumer loans serve many purposes essential in helping people in their financial situation.
Different Types of Consumer Finances
1. Mortgage
A mortgage is a type of loan which the mortgage lender or a bank provides. It enables the borrower to purchase any property like a house or an office. It is possible to take out loans to cover the entire cost of a property, but the loan is secure for about 80% of its value.
The mortgage loan has a long repayment period. It is also a secure type of loan. Therefore, the property purchased acts as collateral money that a borrower has taken from the lender. There are many types of mortgages. They are listed below.
- Fixed-rate mortgages
- Adjustable-Rate mortgages
2. Credit Cards
A credit card allows an individual to buy items without paying for them in cash. Each credit card has its unique number. A person can use this number with other details on the card to buy goods and services.
When a payment is made via a credit card, the credit card owner gets a credited amount in their account after the purchase. By the due date, the owner has to clear the balance in the account. If not, they would be charged an additional interest when they clear their balance.
A credit card offers a person a line of the credited amount used to make any purchases, balance transfers—the cash credited from the credit card is required to be paid back in a certain amount of time. When a person uses a credit card, they will need to make a minimum amount of purchase before the balance’s due date.
3. Auto Loans
An auto loan is a loan that is taken to buy any automobile. The auto loan is also known as an automobile loan. Commonly, an individual borrows an auto loan to purchase a car or any other automobile.
4. Students Loans
A student loan is money borrowed from the government or a private lender, or a private bank to pay off educational institutions’ fees. These kinds of loans can be paid off later, which builds up over time.
Most people opt for this loan to pay off tuition, hostels, books, institutional, or educational fees. After graduation, when it is time to start paying these types of loans back, companies like Purefy are there to help refinance loans so students can ensure they are receiving the best interest rates.
5. Personal Loans
A personal loan is an installment loan that provides funds to its borrowers to use for any purpose. It’s different from auto loans, mortgage, or student loans which are usually taken for specific reasons.
Personal loans are available from official banks or credit card unions, or other online lenders. An individual can take up these loans from home improvement consumer financing companies for any home issues.
Different Categories in Which You Can Take Loans
Below are the four categories of loans that you can opt for –
- Secured consumer loans
- Unsecured consumer loans
- Open-end loan
- Closed-end loans
Secured Consumer Loans
Secured consumer loans are backed by collateral (collateral is an asset used to cover the loan if the borrower has to default). These loans are generally granted to the borrower in large amounts and have long repayment periods, with lower charged interest rates.
As collateral assets back a loan, the risk that the lender faces is less. For example, suppose a borrower gives a collateral asset. In that case, the lender will take the collateralized defaults and make liquid money to make the borrower pay the outstanding amount.
Unsecured Consumer Loans
Unsecured consumer loans are that loans that are not backed by any collateral asset. These loans are normally granted to the borrowers in a limited amount of finance, and they have shorter periods of repayments with higher charged interest rates.
As any collars set does not back the loan asset, the lender has to face more risk. For example, if a borrower takes the loan from the lender, there is no way for the lender to recover the outstanding amount. The only option they have is to wait till the borrower is ready to repay them.
Open-end Loans
Open-end consumer loans are also known as revolving credit. It is a loan in which the borrower can use the money to make any purchases. But the borrower must pay back the amount to the lender with interest before the decided date. (The date is decided by the borrower and lender together before the borrower takes the loan).
Open-end loans are generally unsecured, and therefore even they do not have any collateral asset involved. If a consumer does not repay the lender before the decided date, the borrower must repay it with more interest.
A perfect example of an open-end loan is a credit card. The consumer can make any purchase with it. They have to pay the outstanding amount when it comes to due. If a borrower cannot settle the amount before the due date, they will be charged interest until the amount is paid off correctly.
Closed-end Loan
The closed-end consumer loan is also known as installment credit. It is used to finance specific purchases in particular. In closed-end loans, the borrower has to make equal monthly payments over a specific period decided.
These types of loans are most of the time secured. Therefore, if a consumer cannot pay the periodic installments amounts, the lender can liquidize the collateral assets that were deposited to the lender by the borrower at the starting of the loan.
Final Thoughts
There are many ways to get these consumer loans. An individual can get these loans from banks, or other cooperating companies, or by any relative or other family members. The only goal of any consumer loan is to help people purchase goods and services which they could not afford alone.