Consumer credit is debt incurred to purchase goods and services for personal use. There are two main types: revolving credit like credit cards which can be used repeatedly up to a limit, and installment credit like loans which are paid back in fixed amounts over time. Consumer credit allows consumers to finance purchases even when funds are low and helps raise living standards, but it can also lead to overspending and long-term financial problems if not managed carefully. The consumer credit industry in India is growing as incomes rise, but more education is still needed about options and responsible use.

1. Indian Financial System CIA-III
Aditya Kashyap 1723004
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Understanding Consumer Credit
Consumer credit is a type of debt which is incurred by a person during purchase or sale.
Consumer credit includes purchases with the help of credit cards, lines of credit and some loans.
Consumer credit is also called as consumer debt. Consumer credit is classified into two
classifications: revolving credit and installment credit. The most common type of it is a credit
card.
Consumer credit helps to finance the purchase of goods or services for self consumption or to
refinance debts incurred for such purposes. The supply of loan by lenders either in the form of
cash loans or by sellers in the form of sales credit.
Consumer credit in industrialized countries is growing at a rapid rate as more people are earning
regular income in the way of wages and salary.
Finance charges on consumer loans generally are higher than the interest costs of business loans,
although the way of quotation costs may disguise the actual charges. Many companies help
consumers manage their credit.
Two Basic Types of Consumer Credit
 Close end credit (installment credit)
One time loans for a specific purpose that you pay back in a specified period of time, and in
payments of equal amounts
Mortgage, automobile, and installment loans for furniture, appliances and electronics

2. 3 most common types of closed-end credit
1. Installment sales credit
2. Installment cash credit
3. Single lump- sum credit
 Open end credit (revolving credit)
Use as needed until line of credit max reached
-credit cards
-department store cards
-home equity loans
You pay interest and finance charges if your do not pay the bill in full when due
Revolving check credit
Bank line of credit
Various important aspects of consumer finance
Parties to the transaction –the number of parties involved in the in a consumer finance
transaction depends up on the type of arrangement
1. Bipartite arrangement – tow parties
a) customer b) dealer-cum-financer
2. Tripartite arrangement- three part
a) customer
b) Dealer (seller of goods)
c) Financer (bank or NBFC)
Modes of consumer finance/ credit – consumer credit may be structured in any of the
following ways
A) Hire purchase- it is a transaction where good are purchased and sold on the terms that
a) Payment will made in installments
b) The possession of the good is given to the buyer immediately
c) The ownership in the goods remain with the vendor till the last instilment is paid
d) The seller can repossess the goods in case of default in payments of any
installment
e) Each installment is treated as hire charge till the last installments is paid
B) Installment system - in this the seller of the goods finance the assets purchased by the
customer. The ownership and possession of the goods is transferred to the customers
on the payment of the first installment. We may have two types of installment system

3. a) Conditional sale- in this the ownership is retained by the seller and only
possession is transferred. This is done to avoid bad debts .
b) Pledge – this system is very famous with bank who advance loan credit on the
security of goods, jewellery, government securities pledged . ones the amount
advance as credit is returned the pledge change is vacated.
C) Overdraft/demand loans - There is very fine silver lining for what overdraft is used
based on certain type of use, it can be considered in consumer finance. In this
individuals can overdraw money from their account upto certain limits as laid down
by the bank, commensurate with the value of security, margins and credit worthiness
of the of individuals customer. Under overdraft, interest is charged on the amount
actually utilized by the individuals. Overdraft can be provided against the following
a) Loan against equitable mortgage of immovable property
b) Loan against NSC/IVP/KVP (NATIONAL SAVING CERTIFICATE /INDRA
VIKAS PATRA/ KISAN VIKAS PATRA )
c) Loan against life insurance policies
d) Loans against RBI relief bonds
The amount of loan to be sanctioned varies in accordance with the age of RBI
bond, the state bank of India adopted the following policy mentioned below
Age Amount of loan Margin
Less the 2 years 65% of the bonds value 35% of bonds value
More the 2 years 80% of the bonds value 20% of bonds value
When borrower desires to
pay through installments
85% of the bonds values 15% of the bounds value
D) Credit cards –it’s a three party agreement between card holder, the bank and the
merchant. The embossed plastic card issued to the customer serves as evidence to
merchant that a bank has granted a line of credit to the holder of the card. Retail
merchant agrees with the bank to accept the card for payment of goods and services
E) Financial corporation – corporations like Bajaj Finserv give credit to consumers
directly so that they can meet their demands and worry later about repayment via
EMIs. It makes it easier for consumer to buy goods without suffering from cash
crunch. Credit given sometimes might even have no interest.
Procedure for granting finance/credit-
a) Per-sanction stage
1. Collect credit information
2. Receiving of application form
a) Personal data
b) Job profile
c) Property details

4. d) Detail of assets to be
purchased
e) Particular of loan
3. Analyzing the customer’s creditworthiness
4. Acceptation / rejection application
5. Entering into a contract
b) Post-sanction stage –
1. Submission of document
2. Payment of credit
3. Transfer of possession
4. Payment of installment
Terms of financing/ finance-
a) Amount of loan and credit
b) Margin requirements
c) Security
d) Period of credit
e) Rate of interest
f) Fees and charges
g) Mode of payment
Purpose of raising consumer finance –
a) Education loan
b) Automobile finance
c) Personal loans
d) Finance to meet festival expanses
e) Finance for medical treatment
f) Holiday finance
Advantages of Consumer Credit-
a) Raising standard of living
b) Forced saving
c) Help consumer meet emergencies
d) Increase in demand for physical goods
e) Current use of goods and services
f) Permits purchase even when funds are low
g) A cushion for financial emergencies
h) Advance notice of sales
i) Easier to return merchandise
j) Convenient when shopping
k) Provides a record of expenses
l) One monthly payment
m) Safer than carrying cash
n) Needed for hotel reservations, car rentals,
and shopping online
o) Take advantage of float time/grace period
p) Rebates, airline miles, or other bonuses
q) Credit indicates financial stability
Disadvantages of Consumer Credit-
a) Temptation to overspend
b) Can create long-term financial problems and slow progress toward financial goals

5. c) Potential loss of merchandise due to late or non-payment and even because of defaulting
of loan/credit.
d) Tires up future income
e) Credit costs money - more costly than paying with cash
Recent Developments in consumer credit-
A) Debit card finance- Directly given by banks because of failure of credit card to
penetrate among the middle class.
B) Buy now pay later – Now various companies like Flipkart has come up with the idea
of buy now pay later this helps the consumer to fulfill their needs without their
pockets getting affected much, this provide flexibility in payment and helps consumer
to balance expenses.
C) Pay later wallets – expanding on the idea of consumer credit market has seen rise of
pay later wallet which provides money to the consumer on credit on the basis of their
credit rating and charge small amount of interest. This helps consumer fulfill and
meet up with their sudden demands even in the times of cash crunch.
Suggestions and Opinions on Consumer Credit and Understanding future scope
 Consumer credit has high chances of future growth because of rising middle class
population and improving economic condition of India.
 Consumer credit industry is blessing for middle class consumer who cannot afford to
spend much on one go. It also makes money management easier and more balanced.
 Lack of orientation about facilities is a big problem for the consumer credit industry and
potential customer therefore get diverted towards other channels like pawn and mortgage.
 Consumer credit has great profitability from even business point of view if credit rating
of borrower is calculated properly and given money on the basis of it. Example – credit
cards.
 Steps are required so that even lower middle class people can enjoy the benefits of
consumer credit.