Definition

The term consumer finance refers to the

activities involved in granting credit to
consumers to enable them to possess
goods meant for everyday use.
Business procedure through which the
consumers purchase semi durable and
durable goods other than real estate in
order to obtain a series of payments
extending over a period of 3 months to 5
yrs.
Types of Consumer Credit
Revolving credit: it is a ongoing credit
arrangement where by the financier on a
revolving basis grants credit. The consumer
is entitled to avail credit to the extent
sanctioned as credit limit ex: Credit Card
Fixed credit: it is like a term loan where by
the financier provides loans for a fixed
period of time. The credit has to be repaid
within a stipulated period ex: monthly
installment loan, hire purchase.
 Cash Loan: Under this type of credit banks and
financial institutions provide money with which the
consumers buy goods for personal consumption
here the lender and seller are different and lender
does not have the responsibility of seller.
Secured Finance: when the credit granted by
financial institutions is secured by collateral it takes
the form of secured finance. The collateral is taken
by the creditor in order to satisfy the debt in the
even of default by the borrower. The collateral may
be in the form of personal property, real property or
liquid assets.
Unsecured Finance: When there is no security
offered by the consumer against which money is
granted by financial institutions, it is called
unsecured finance.
Sources of Consumer
Finance
Traders : The predominant agencies that are
involved in consumer finance are traders. They
include sales finance companies, hire purchase
and other such financial institutions.
Commercial Banks: Commercial Banks provide
finance for consumer durables. Banks lend large
sum of money at wholesale rate to commercial
or sales finance companies, hire purchase
concerns and other such finance companies.
Banks also provide consumers personal loans
meant for purchasing consumer durable goods.
 Credit Card Institutions: These institutions arrange for
credit purchase of consumer goods through respective
banks which issue the credit cards. The credit card
system enables a person to buy credit card services on
credit. On presentation of credit card by the buyer, the
seller prepares 3 copies of the sales voucher, one for
seller, bank/credit card company and 3rd for the buyer.
The seller forwards a copy to the bank for collection.
The sellers bank forwards all such bills to the card
issuing bank or company. The bank debits the amount
to the customers account. The buyer receives monthly
statement from the card issuing bank or company and
the amount is to be paid within a period of 20 to 45
days without any additional charges.
 NBFCs:Non banking Financial companies
constitute an important source of consumer
finance. Consumer finance companies also known
as small loan companies or personal finance
companies are non saving institutions whose
prime assets constitute sale finance receivables,
personal cash loans, short and medium term
receivables. These companies charge substantially
higher rate of interest than the market rates.
Credit Unions: A credit union is an association of
people who agree to save their money together
and in turn provide loans to each other at a
relatively lower rate of interest. These are caller
co-operative credit societies. They are non profit
deposit taking and low cost credit institutions.
Mode of Consumer Finance
Open Account: any number of
purchases per month up to a certain
value
Credit card: most popular mode of
finance
Revolving account: purchases during
a month and payment on installment
basis
Option plan: option of paying in full
or part
Installment account: Equal periodic
Demand for consumer
finance(Factors)
Increase in consumer disposable
income
Enhancement in real income of
consumer
Convenient size of installment
payment
Growth in nuclear families leading to
number of house holds
Lower charges
Down payment and credit contract
Products covered
Consumers financing covers a wide
range of products such as cars,
Televisions, washing machines,
refrigerators, Air conditioners,
computers etc. The products covered
possess some distinct feature such
as durability, sustainability, salability
and serviceability etc.
Terms of Finance
Eligibility : The basic eligibility for consumer finance is the
income of the individual customer and the nature of
employment. The EMIs are worked out on the basis of
number of installments and tenure of employment of the
customer.
Guarantee: Financiers insist on guarantee for the credit
availed by the customer. Guarantee is obtained in order to
ensure prompt payment of the installment.
Tenure : Consumer finance is granted for short period
ranging from 3 months to 5 yrs. The tenure also depends on
the value of the asset purchased. Assets of smaller value
are given short term credit and assets of higher value are
given comparatively longer term credit.
Rate of interest : the effective rate of consumer finance is
much higher than the rates applicable to business finance.
This is because the loans are granted based on the personal
integrity of the customer. The effective interest varies
between 20% and 30%. Finance companies use different
 Other charges : in addition to rate of interest finance
companies also charge documentation fees, processing
fees, management fees, service charges, collection costs
etc. A deposit is also taken as a precautionary measure to
guard against default in payment of installments.
Mode of payment: in case of individual loans payments are
usually collected in advance in the form of post dated
checks.
In the case of institutional financing there is an
arrangement for deduction of installments from the salary
of the employee which is remitted to the finance company.
Credit evaluation: A verification of details furnished by the
customer is carried out in order to ascertain the validity of
the statement and the credit standing of customer. The
evaluation may be carried out by the financier or an
independent agency details collected include age, monthly
income, status of employment, previous record, assets
own, borrowers equity, type of collateral offered etc.
Pricing of Consumer Finance
The pricing of consumer credit
depends on the extent of facility
offered by the financier. The
components of price are risk free
rate of interest assuming no
probability of default, default risk
premium, administrative expenses.
Advantages of Consumer Credit(Finance)

Enjoying possession : An important benefit of

consumer credit is that it allows people to enjoy
possession of goods without having to pay for
them immediately.
Saving : consumer credit allows for a mechanism
of compulsory saving this induces people to use
their income wisely and promotes thrift among
people.
Convenient mode : Consumer credit offers a
convenient mode of acquiring consumer durables.
Meeting emergency : Consumer credit is useful in
meeting emergencies such as illness, accident
and death which involve unexpected expenses.
 Maximization of revenues: Consumer credit
facilitates speedy disposal of goods which
would have remained unsold in the
absence of credit facility to consumers. This
helps in increased sales and profits through
credit sales.
Accelerates industrial investment:
Consumer credit accelerates investment in
consumer durable industry giving rise to
growing level of income and employment.
Enhanced living standard : consumer credit
enables people of limited means to acquire
goods to enhance their general standard of
living.
 Promoting Economic development :
Consumer credit promotes higher levels of
investment, employment and income thus
raising the effective demand and promoting
higher standard of growth and
development.
Disadvantages of Consumer Finance

Thoughtless buying : consumer credit being

attractive tempts people to buy goods
indiscriminately even if they are not needed.
Insolvency : Credit forces people to mortgage a
substantial portion of their fixed future income
which may lead to insolvency and bad debts.
Costly Credit : Consumer credit with its benefit
of convenient buying brings with it severe
consequence of costliness of credit because the
effective rate of interest is much higher than on
paper.
 Risk to traders : Consumer Credit possess
considerable risk to traders because if the buyer
defaults on payment the lender can acquire the
good but cannot sell it at the original price.
Artificial Boom: Consumer credit creates artificial
boom in consumer durable industry.
Bad Debt : Consumer credit generates a
substantial amount of revenue for traders but
there is a high risk of bad debt.
Economic instability: Indiscriminate consumer
credit leads to economic instability because of
recurrence of booms and slumps. In boom there
is credit extension and in recession there is
credit tightening.
 What are Credit Cards?

Pre-approved credit which can be used for the purchase of

items now and payment of them later.
 Credit cards
It is a plastic card having a magnetic strip,
issued by a bank or business authorizing
the holder to buy goods or services on
credit. Also called charge cards
The concept of using a card for was first
described in 1887 by Edward Bellamy in
his utopian novel Looking Backward.
The size of most credit cards is 85.60
53.98mm
Eligibility For Getting The Card
Person should have a savings or
current account in the bank.
His assets and liabilities on a
particular date are reported to bank.
A statement of annual or monthly
income.
He is considered credit worthy up to
certain limit depending upon his
income, assets and expenditure.
 Particulars Displayed On Credit
Cards
Name of the customer
16-digit card number
Validity date
The VISA hologram and the VISA logo
Name of the issuing bank
Signature period
Magnetic strip
PIN
What does 16 digit means
 CLASSIFICATION
OF CREDIT CARDS

Based
Based on Based on Based on
Based on on
mode of status of geographi
franchis issuer
credit credit cal
e/ Tie-up Categor
recovery card validity
y

Individ Corpor
Revolving Internatio
Charge Domestic - -
credit n-
Card card ual ate
card al Card
Cards Cards

Proprie- Domesti
Master VISA
tary c Tie-up
Card Card
Standard Business Gold card Card
Card Card Card
Based on mode of credit recovery
Charge Card-A card that charges no
interest but requires the user to pay his/her
balance in full upon receipt of the statement,
usually on a monthly basis. While it is similar to a
credit card,the major benefit offered by a charge
card is that ithas much higher, often unlimited,
spending limits.
Revolving credit card-A line of credit
where the customer pays a commitment fee and
is then allowed to use the funds when they are
needed. It is usually used for operating purposes,
fluctuating each month depending on
thecustomer'scurrent cash flow needs
Based on status of credit card

Standard Card- it is a generally issued

credit card
Business Card- (Executive cards ) it is
issued to small partnership firms ,
solicitors, tax- consultants ,for use by
executives on their business trips.
Gold Card-a credit card issued by credit-
card companies to favoured clients,
entitling them to high unsecured
overdrafts, some insurance cover, etc
Based on geographical validity

Domestic card- Cards that are

valid only in India and Nepal
are called domestic cards.
International Card- credit
Cards that are valid
internationally are called
international cards.
 Based on franchise/ Tie-
up
Proprietary card- A bank issues such cards
under its own brands. Eg. SBI card Cancard of
canara bank
Master Card- this card is issued under the
umbrella of MasterCard International
VISA Card it is issued by any bank having
tie up with VISA international
Domestic Tie-up Card- it is issued by any
bank having tie up with domestic credit card
brands such as CanCard and IndCard .
 Based on issuer Category

Individual Cards- Non-

corporate cards that are
issued to individuals
Corporate Cards- Issued to
corporate and business firms.
 Innovative Cards
ATM Cards
Debit Crds- debits designated saving
bank a/c.
Private label Card- issued by retailers and
can be used only in that retailers store.
Affinity Group Cards- it can be used by
collection of people with some form of
common interest or relation ( professional
,alumni,retired persons org. )
 Credit card cycle
A card holder makes purchase , and
present it to the merchant instead of
cash .
The retailer will check the number on
the card , and he will tally signature
of voucher and credit card .
Vouchers are send to banks, which in
turn reimburses it for the customers
purchase.
 Credit card cycle
Purchase of goods and
Credit purchase service on card

merchant delivers goods after taking an authenticated

credit card and noting the number and taking
Credit card processing signature on certain forms.
Merchant raises the bill for the purchase and
sends it to the credit card issuing bank for
Bill raising payment

Issuing bank pays amount to the merchant

establishment
payment

Issuing bank raises bill on the credit

Bill to card holder cardholder and sends it for payment

Credit card holder makes the

Card payment
payment to the issuing bank
Mechanics of Credit Card Operation
Contract for credit card (1)

Issue of credit card (2)

Card Issuing Card User /
Payment of credit card(3)
Bank Customer

Clearing and settlements (7)

Charging of credit card

Purchase of
and raising bills (4)
goods and

services (3)

Marchants Submission of bill Merchant

bank for collection (5)
establishment
Payment for bills (6)
 Advantages
To Cardholders :
Simple, convenient and can be substituted for cash
Convenient method of payment
He need not approach a bank for taking credit
Credit cards issued by leading banks are acceptable in many
countries
Holders can withdraw cash from any branch of major banks
worldwide.
Issuer of card provides 24 hrs customer helpline available
across the world in case of any emergency.
To Merchants/ Shopkeepers :
Guaranteed payment
Lessens the security risk of holding the
cash
Overseas visitors may purchase more,
providing new market for retailer
To credit card companies/ Banks :
Source of revenue
- Joining fee
- card renew fee
- services charges from retailers
- Interest charged to customer
 Disadvantages
To cardholders :
Loss or stealing of card
To Merchants/ Shopkeepers :
Retailers are required to pay a certain fee and service
charges at an agreed percentage of their credit card
sales.
To credit card companies :
Risk of bad debt
Risk of fraud
 Safety Tips
Sign card with signature
Do not leave cards lying around
Close unused accounts in writing and by phone, then cut up
the card
Do not give out account number unless making purchases
Keep a list of all cards, account numbers, and phone numbers
separate from cards
Report lost or stolen cards promptly