‘Consumer loans’ is an umbrella term used primarily in association with credit cards and short term personal loans. These financial products allow people with far greater flexibility when it comes to making purchases.
When responsibly managed they can provide considerable other benefits such as building a credit score, extended payment insurance, 0%/very low fixed term interest incentives and much more.
As with all financial services, it is important that prospective consumer loan applicants understand the risks and temptations of having ready access to considerably greater funds than they receive in their monthly paycheck.
But when used well, consumer loans can offer fantastic benefits.
How do consumer loans work?
For most of this article, we’ll be looking primarily at credit cards as the majority of people will be eligible for these products.
Until the global financial crisis of 2008 it was extremely cheap and easy to be approved for credit, and while the boundaries have been tightened there is still easy access to credit for most people.
While the familiar rules still generally apply, it is important to understand that the world of consumer credit is also one that changes and adapts to the market conditions.
The Scandinavian company instabank is one example which has found success by offering flexible payment structures (ideal for temporary or self-employed workers) – something quite unheard of until recently.
When applying for a consumer loan (credit card or personal loan) your prospective lenders will assess your application based upon a wide spectrum of criteria.
Employment status and income are the most obvious, but they will also look several years back into the credit history and take into consideration savings, investments and property ownership.
In many cases, they will also request an ‘affordability’ check whereby customers outline their monthly expenditures and demonstrate they have enough funds to make scheduled repayments.
All of this data is then drawn together and the lender will provide an interest rate (which can vary enormously) as well as minimum payment schedules that they deem appropriate to your financial status.
Consumer loan companies
Consumer loans offer immediate & potentially cost-effective solutions
It is essential that people never view credit loans as being a form of ‘free money’. Doing so is always going to result in debt and potentially drastic financial problems.
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Instead, those who do manage consumer loans successfully, adopting a view that their financial product is a kind of tool. Say for instance that you have moved into a new property and desperately need a couple of essential appliances (washing machine, cooker/stove, refrigerator, etc.).
Not many people could afford to just purchase these out of savings and taking out store credit can be exorbitantly expensive. A consumer loan may offer 0% interest for six months, allowing people to purchase all of these items at once, and pay them off over a half year without it costing them a penny.
Once again, the keywords here are planning and responsibility. Referring back to the example above, if you cannot afford to cover the outlay over six months then it may still be ‘worth’ taking a little longer – and accepting to pay some interest – in exchange for a longer term.
Even three months at 18%/APR is only going to be marginally more than intended. But it is essential to avoid just paying the minimum fees (often only servicing the accrued monthly interest and a tiny fraction of the amount borrowed) unless you wish to spend many years paying off the purchase!
A well managed consumer loan builds good credit
Many people new to learning about financial services find it peculiar that people having a history of borrowing money tend to be those who are offered the best rates and greatest rewards.
After all, why should someone who is constantly borrowing be offered more? Surely there will come a point whereby their wages cannot cover the repayments? A decade or so ago to an extent that was the case – and we all saw what disastrous consequences that ‘never tomorrow’ attitude delivered.
However, consumer loan companies are more willing to lend at better rates to people who are proven to be good customers.
What makes a good customer? Obviously, good customers are those who make repayments on time – but there is more to this than just being good with money. Credit card and loan companies know that only a very small proportion of people pay off purchases made using their products without accruing interest.
From their perspective, such clients offer zero value apart from helping their profile and accountability for being a responsible lender. Instead, ‘good’ customers are those who will pay off their debts alongside some interest.
Such people are the majority – which is why so many people receive offers of extended credit from other agencies so often.
Chances are that you will have heard of some people who have many credit agreements, transfer balances between them, and use loans to build credit scores up. This is a perfectly valid way of building a credit score because it demonstrates across multiple lenders that someone is capable of managing money.
While a sizable debt may exist, on the balance sheet this is a person who is constantly repaying the full amount across a range of lenders products every month. With credit agencies, this is someone who is good with money – even if they are carrying a sizable debt that they have little chance of paying off. Major credit agreements such as mortgages, business, and bridging loans will be much more forthcoming – and offered at preferential rates – to people who can prove they are good at handling money (even if they don’t have much).
Added bonuses of consumer loans
From a purely financial standpoint, using credit to build credit is the key advantage of consumer loans. But there are additional benefits that can help customers when making major purchases. Most credit card companies (check their individual policies first) will offer an additional layer of payment protection from fraud.
Should you pay for a product using their services and be defrauded, they will cover any financial loss in full. This is one reason why many APR amounts are so high.
It is also quite common for this additional protection to include an extended warranty on selected big-ticket purchases. Consider a consumer credit card as a middleman service that basically takes the fall should you be unlucky enough to be ripped off.
Many of the big names, credit companies – including cards and personal loans – will offer additional incentives. These can range from anything from a small cashback incentive through to air mile points, preferential exchange rates and a host of additional insurance benefits.
Highly valued customers can even be offered a financial concierge service that ensures other aspects of personal finance such as savings and mortgages are being conducted at maximum value.
Just remember that many of these rewards are dependent on the customer remaining value and fail to make a repayment in just a sole month can immediately invalidate these benefits.
Consumer loans can offer amazing advantages to customers who both take the time to understand how they work and are responsible when managing them. It is not uncommon for those who successfully use these products to save many thousands over the years when they are used as a tool instead of considered to be a luxury.
Even people who have learned how the credit industry works the hard way can always get back on track rebuilding their credit score. Just be aware that it can take time. Never be afraid of looking at changing provider – or even better suggesting to an existing creditor that you may be open to doing so – whenever there is a better offer available.
Credit is a flexible business and chances are that you will be rewarded for loyalty at every turn.
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