What Are the Advantages of Consumer Credit?
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Last edited Mar 2022 — 3 min read
From credit cards to personal loans, there’s a wide range of methods consumers use to spread the cost of their purchases over time. Consumer credit comes with pros and cons attached, which it’s important for both buyers and merchants to be aware of. What are the advantages and disadvantages of consumer credit? Keep reading to find out.
What is consumer credit?
To begin with, what is consumer credit? This term encompasses most forms of personal credit you’re probably already familiar with, including credit cards, mortgages, car loans, and personal loans. It includes unsecured loans and programs allowing people to purchase goods and services while spreading the cost over time.
What are the types of consumer credit?
Consumer credit is offered to individuals through retailers or through larger institutions like credit card companies and banks. It covers any type of personal debt allowing a shopper to make an immediate purchase and pay the cost off over time, usually with interest. There are two main types of consumer credit:
- Installment credit: The customer spreads the cost of a specific purchase over time. Payments are typically made weekly or monthly in equal installments, with low interest rates. In some cases, like Buy Now Pay Later (BNPL) plans, repayment plans are interest-free as the loan is paid off quickly. Installment credit is often secured because the purchased item (like a house or car) usually serves as collateral in case of default.
- Revolving credit: This type of consumer credit includes credit cards, which don’t need to be used for a specific purchase. Instead, the consumer has access to a revolving line of credit up to a maximum limit. This is refreshed as the borrower pays off their debts with minimum monthly payments. Because the loan is unsecured with collateral, interest rates are higher.
What are the advantages and disadvantages of consumer credit?
There are pros and cons to using credit for purchases. What are the main advantages of consumer credit for the average buyer, and what should you be wary of?
What are the advantages of consumer credit?
- Emergency preparedness: A revolving line of credit comes in handy if you face unexpected expenses like a broken-down car or appliance.
- Convenience: There’s no need to carry around large wads of cash when shopping.
- Flexibility: Rather than saving for years to cover the cost of each purchase in full, you can choose payment plans that give access to products and services immediately. Consumers can also avoid putting off expenses that could grow more costly over time, like home repairs.
- Customer rewards: Many credit card companies and retailers offer special discounts, perks, and rewards for purchasing large items on credit. Additional benefits include cash-back offers and frequent flier miles.
What are the disadvantages of consumer credit?
- Interest rates: When you pay for a product upfront, you simply pay the sticker price. Paying with credit inflates the price with interest rates over time. Average credit card APRs can be as high as 21% or more.
- Stretching finances: Consumers must be wary of overextending their finances. Borrowing money might encourage some individuals to spend more than they earn, quickly getting in over their head with debt.
What are the main advantages of consumer credit for businesses?
They offer flexibility and convenience to your customers, but what are the main advantages of consumer credit for businesses? Should you extend credit to your clientele? Here are a few reasons to consider it:
- Extending consumer credit can keep you competitive by appealing to a wider base of customers who are looking for affordable ways to spread payments. This translates to more sales.
- Extending credit can also build brand loyalty as customers feel a sense of trust. You can enhance this loyalty by offering rewards for on-time payments and frequent purchases.
If you’re not ready to fully operate your own loan or credit programs, you can simply offer Buy Now Pay Later as a payment option with the help of providers like Klarna and PayPal. This type of consumer credit is on the rise, with a recent GoCardless survey finding that close to half (46%) of Americans finding it difficult to keep track of how many BNPL plans they have open. Furthermore, during 2021’s festive shopping season, 42% of all shoppers and 60% of Millennials planned to use BNPL. It’s worth considering this growing trend as you look for new ways to make shopping easier for your customers.
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Advantages and Disadvantages of Consumer Credit
In our modern society, the use of consumer credit has become increasingly prevalent. Even those who do not have credit cards or bank loans cannot claim to be entirely free of credit. It seems that only those who live in isolated areas without access to regulated utilities such as electricity or water can truly be considered credit-free.
Despite this, it is important to understand the advantages and disadvantages of retail credit and decide whether it is a good fit for your financial situation.
Advantages of Consumer Credit
Personal credit can offer many benefits, including financial flexibility, rewards, and convenience. However, you must be aware of the costs involved and use credit wisely and responsibly. Only by understanding the pros and cons of personal credit can individuals make informed decisions about their financial well-being.
Spending Flexibility
One of the most significant benefits of consumer financing is the financial flexibility it offers. In the past, purchasing large items such as a home or car was often impossible without saving up enough money first. However, with credit options like bank loans and credit cards, it is now easier to make these purchases.
Revolving credit can also provide quick access to funds when you most need it for unexpected expenses. Still, you should be aware of the costs and interest rates involved before using credit for these purposes.
Store Rewards and Other Perks
In addition to financial flexibility, there are other advantages to using consumer financing. Many retailers and car dealers offer deferred payment plans and low-interest rates. Credit card users can also earn rewards such as cashback, frequent flyer miles, and other perks. However, it is important to use credit wisely and responsibly, paying off the full balance each month to avoid finance charges.
Furthermore, using credit can also be convenient, as it eliminates the need to carry cash. It also allows individuals to establish a credit history, which can be beneficial in the long term.
Disadvantages of Consumer Credit
While there are numerous advantages to using personal credit, it is important to acknowledge and consider the potential drawbacks associated with its use. Weigh the benefits and drawbacks of consumer financing when deciding whether or not to use it.
High Interest Rates, Charges, and Penalties
One of the significant disadvantages of using retail credit is the high-interest rates, fees, and penalties that come with its use. Credit card interest rates can be quite steep, often exceeding 20%, and can result in people paying substantially more than the original cost of the item they purchased. Late fees and other penalties can also add up quickly, putting individuals in a difficult financial situation.
To avoid getting into a debt spiral, it is critical to carefully consider the interest rates, fees, and penalties before applying for consumer financing. It may be a good idea to pay off credit card purchases as soon as possible or consider other forms of financial services with lower interest rates.
Easy to Overspend
Personal credit can make it easy to overspend, particularly if you have access to multiple credit cards or lines of credit. With the convenience of credit, it becomes easy to purchase both essential and non-essential items without much thought.
This can lead to overspending and the development of impulsive buying habits. It’s also common for consumers to buy things that they do not need or can’t afford, leading to high-interest debt and financial reinsurance, which can be difficult to repay. In extreme cases, this can lead to bankruptcy and even employment discrimination.
Although there are potential drawbacks to using retail credit, it’s important to remember that it can effectively manage your finances when used responsibly. Utilizing retail credit can provide spending flexibility and even rewards or perks. However, it is crucial to be cautious when using personal credit and to make sure you can afford to make payments on time.
Reap the Advantages of Smart Spending
Before applying for any form of consumer credit, it’s essential to understand your financial situation, including your income, expenses, and debts. Having a budget in place and sticking to it can help you avoid overspending and going beyond your means. If you need assistance in managing your finances, it is advisable to seek help from financial advisors like neutral Noah Hanft, who can provide professional guidance on how to improve your financial situation.
https://gocardless.com/en-us/guides/posts/what-are-the-advantages-of-consumer-credit/https://smallbusinessmagazine.org/advantages-and-disadvantages-of-consumer-credit/
