Consumer Loans Defined

Consumer loans are those types of loans that are used to purchase consumer goods which generally are goods which depreciate. It is a type of personal lending that has different repayment and interest rate structures that typically match the length of time the item purchased can continue to be used so that during the duration of the loan the lender can repossess it to get repayment on the original loan if the consumer defaults on the loan.

Generally consumer loans aren’t intended for items that are readily consumed such as a fine dinner because for that purpose you would use a credit card if you cannot afford to pay for it after you have consumed it. In the US consumer loans may exclude personal automobiles as this type of financing may fall under different credit guidelines. For an automobile loan the financial institution or bank or credit union will perhaps work directly with the vehicle manufacturer to provide financing right at the point of purchase. Of course for this type of loan you will have to fill out the credit applications and generally have a good credit rating and usually are required to have a steady income source.

Also although a home may qualify for a consumer loan mortgages are not usually considered consumer loans as in theory during a normal financial environment the underlying collateral will appreciate so that if the borrower defaults on the mortgage they lender can come and take back the home and sell it to get their money back.

Consumer loans are more often associated with a big item purchase such as a big screen TV or an entertainment center or new washer and dryer from one of the retailers who sell these products. If you can’t afford to pay for it when you purchase it these retailers have joined up with finance companies who makes a profit from financing this purchase. The interest rate won’t match the Federal Reserve lending rate for banks because this finance company has to make some money on the loan.

This type of loan will generally be structured as an installment loan with a two year repayment date. The length of the loan will often match the length of time that product will hold its value. Finance companies who do this type of financing really don’t want to take back that item because they won’t get much money for it so the loan will carry a higher interest rate with it. They are lending money at a higher risk so the money will cost you more to borrow. They can afford to do this because they have a large pool of borrowers a large percentage of which will repay the loan of time so that is where they make their profits.

Generally this type of loan will be made to someone with less than stellar credit. The loan may carry up to fifty percent or more of the cost of the product as interest so in effect you will be paying for that item twice.


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