A consumer loan is one of the most popular forms of financing to acquire a product or service. The possibility of deferring payments or making them in small instalments encourages many consumers to buy a larger television for their homes or the car they love so much.
Silvia has planned to go on vacation, but she has no money for the trip. Consequently, she has decided to get information to apply for a consumer loan to finance it. In this way, she can enjoy a few days off and repay the amount in easy instalments.
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What is a Consumer Credit?
It is a contractual relationship in which a lender (a bank or a financial institution) grants credit to a beneficiary. So that he can acquire a specific product or service and pay for it through a means of financings. Such as a loan or deferred payment.
This form of financing is not new. The International Association of Pledged and Social Credit Entities pointed to the second half of the fifteenth century as its origin. When the Franciscan friars of Italy lent money to the peasantry to help them with their payments.
Consumer credit is a type of personal loan, like other options such as fast loans or subsidized loans. However, the main characteristic that differentiates it from these lies in its purpose: this financing is intended for consumption.
If you want to know more about this type of credit and its relationship with a personal loan, you can read this article from Your Next Future.
How to Request a Consumer Credit?
Suppose Silvia finally decides to apply for a consumer loan. In that case, she will be able to resort to two types of lenders: her bank or, depending on the nature of the product she wishes to apply for, a trip with the financial institution that has an agreement with the travel agency in which you will contract your vacations.
Regardless of this, both entities will carry out a consumer credit agreement once they have approved the request to formalize the financing. In this sense, the document must include:
The Amount Borrowed and The Interest Rate.
The longer the term of return of the money, the lower the monthly fee, although the total cost will be higher because interest will be paid for a longer time.
The Repayment Terms and The Amount of The Monthly Installment
determined by the equivalent annual rate (APR) and the term. The higher the APR, the more expensive the credit will be.
Opening and Cancellation
The Right of Withdrawal and The Early Repayment Commission
In the latter case, the consumer can return the entire credit before the end of the contract but must be aware of the charge he has to assume for the early settlement.
Although we can associate these issues with loans, we should not confuse them with credits. The former are operations oriented to the medium or long term where the lender offers a fixed amount; while in the latter, focused on covering small liquidity needs in the short time, a maximum amount is provided that does not have to use in its entirety.
If you want to know more differences between credits and loans, you can do so by reading this Finance for Mortals article.
What Should We Take into Account before Requesting a Consumer Loan?
If we are going to request a consumer loan, we must assess whether we can meet the conditions of the contract. To do this, we must analyze our financial situation realistically to know if we will assume the debt without this being a major problem. In this sense, we should limit ourselves to considering the expenses and income that we have at the moment. It should also be borne in mind that unforeseen costs may arise that make it difficult to reimburse the requested amount. For this reason, it is necessary to leave an economic margin to face them.
Another issue to which we must pay attention is the return. Delaying in it directly impacts the increase in interest; and, therefore, the amount to return. To avoid this, you must agree with the lender, whether a bank or a financial institution, both the amount requested and those important conditions, among which is the repayment term.
It is essential to consider these aspects because, in consumer loans, there is no real guarantee, that is, a contract by which a natural or legal person assumes the payment obligations of the beneficiary, if the beneficiary does not respond; but rather the client commits his present and future properties to react to the debt. For this reason, its solvency must be previously studied.