Consumer financing is the lending
of specific amounts of money to consumers. Although consumer financing is technically a loan, this type of financing
can take several forms. Some of these forms include credit cards, mortgage
loans and car loans. This type of financing can also be referred to as subprime
rate or prime rate loans. In the financial world, there are two main types of
customer credit or consumer financing. These include unsecured and secured
credit. Unsecured credit is a type of credit that is not backed by collateral.
Therefore, this form of credit is short-term and consumers who consider this
option will have to pay high interest rates compared to any other form of
credit.
Secured credit on the other hand
is credit that is backed by collateral. The collateral could be a car title,
house, business or any other form of asset. This collateral can be seized
anytime in case a borrower defaults on payments or terms of the loan. When most
people talk of customer financing
nowadays, most of them usually refer to unsecured loans or credit. This is
because it is easy to get this loan and the loan can be processed within hours
or weeks depending on the amount of money requested. Even though the loan comes
with the highest interest rates compared to secured credit, it is the best loan
to use on a short-term basis and repay it (typically within 30 days based on
the terms of the loan and loan amount).
Unsecured consumer financing today includes student loans, credit cards and
personal loans. For consumers, it is important to use these loans reasonably,
because apart from their interest rates being high, penalties for defaulting in
their payment are also harsh. The advantage with unsecured consumer loans is
that they can help pay off unexpected or necessary expenses like home repairs
and medical bills.
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