Consumer finance

Meaning
Consumer finance in the most basic sense of the word refers to any kind of lending to consumers. In the United States financial services industry, the term "consumer finance" often refers to a particular type of business, sub prime branch lending (that is lending to people with less than perfect credit).

 This branch of the financial services industry is more extensive in the United States than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit ratings than their counterparts in many other countries. American General Finance, Duvera Financial, Lendmark Financial Services, HSBC Finance, CitiFinancial, Wells Fargo Financial, and Monterey Financial Services, etc.

 The term consumer finance refers to the activities involved in granting credit to consumers to enable them possess own goods meant for everyday use. It is known by several names such as credit merchandising, deferred payments, installment buying, hire purchase, pay-out-of income scheme, pay-as-you earn scheme, easy payment, credit buying, installment credit plan, etc.

DEFINITION
Business procedure through which the consumers purchase semi-durables and durables other than real estate, in order to obtain from them a series of payments extending over a period of three months to five years, and obtain possession of them when only a fraction of the total price has been paid. - Reavis Cox

TYPES
Revolving Credit An on going credit arrangement similar to a bank overdraft, whereby the financier, on a revolving basis, grants credit, is called revolving credit. The consumer is entitled to avail credit to the extent sanctioned as the credit limit. An ideal example of revolving credit is credit cards. Fixed Credit This like a term loan whereby the financier provides loan for a fixed period of time. The credit has to be squared off within a stipulated period. Examples of fixed credit include monthly installment loan, hire purchase, etc.

 Secured Finance when the credit granted by a financial institution is secured by a collateral, it takes the form of secured finance. The collateral is taken by the creditor in order to satisfy the debt in the event 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 institution takes the form of unsecured finance. Cash Loan Under this type of credit, banks and financial institutions provide money with which the consumers buy articles for personal consumption. Here, the lender and the seller are different. The lender does not have the responsibilities of a seller.

MECHANICS OF CONSUMER FINANCING

SOURCES OF CONSUMER FINANCE

Traders Commercial Banks Credit Card Institutions NBFCs Credit Unions Middlemen Brokerage firms Sales finance companies Life insurance companies.

DEMAND FOR CONSUMER FINANCE-FACTORS

1. Increase in consumer disposal income 2. Enhancement in the real income of consumers 3. Convenient size of the instalment payments 4. Growth in nuclear families leading to spurt in number of households 5. Lower charges 6. Down payment and credit contract

Terms of Finance
Eligibility Guarantee Tenure Rate of interest Other charges Mode of payment Credit evaluation

Consumer credit scoring: Dunham Greenberg Formula

Specific Fixed Formula

Machinery Risk Formula

This method is prominently used in government offices for granting loans to employees. According to this method, the loan amount to be sanctioned is determined as follows: Down payment + (0.124 x Monthly income) + (6.45 x Length of service in months)

Arguments in favor of consumer finance

Enjoying Possession Compulsory Saving Convenient Mode Meeting Emergency Maximization of Revenue Realization of Dreams Accelerates Industrial Investment Enhanced Living Standard Protection Against Inflation

AGAINST CONSUMER FINANCE

Insolvency Costly Credit Risk to Traders Artificial Boom