Consumer credit is a bank term for loans used to purchase goods with a limited shelf life, such as a car, a holiday or white goods. The most important forms of consumer credit are:

  • Personal loan
  • Revolving credit
  • Red on your checking account
  • Hire purchase
  • Rent buy

How does a consumer credit work?

How does a consumer credit work?

If you are going to take out a consumer loan with a bank, you will first have to determine the credit sum. That is the amount that you borrow and that you have to pay back. The credit sum can be fixed, but also variable. That depends on the type of credit you choose. In the case of a variable credit sum, a credit limit is also set. That is your maximum loan that you can get from the bank.

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Consumer loan – Interest

Consumer loan - Interest

As a borrower, you pay the lender a credit payment in the form of interest. This interest consists of a number of components:

  • The interest costs incurred by the lender to raise money
  • Overhead costs of the lender, for example for marketing, office and personnel
  • Commission from the lender to an intermediary
  • Storage for the credit risk
  • Profit storage

Consumer credit – Nominal and effective interest

Consumer credit - Nominal and effective interest

When comparing interest rates, note that there is a difference between a nominal credit fee and an effective credit fee. The sum of the components listed above form the nominal interest. The effective interest rate is slightly higher. That is because the rate takes into account that you do not pay the interest at once at the end of the year, but per month.

The nominal interest rate is therefore actually a fictitious interest that would be applied if the interest had to be paid annually and there were no monthly transaction costs.

Credit meaning – Descending credit

Credit meaning - Descending credit

The two most important forms of consumer credit are descending credit and revolving credit. With expiring credit you must repay the loan within a pre-agreed term. Repaid amounts cannot be withdrawn. An example of expiring credit is the personal loan. With this form of consumer credit, loan amount, interest and term are fixed.

Consumer credit meaning – Revolving credit

Consumer credit meaning - Revolving credit

With a revolving credit, you agree a credit limit with the lender. That is the maximum amount that you can borrow. You then decide yourself how much and when you borrow from that credit. So you have the freedom to repay the amount early. And if you want to withdraw repaid amounts once, you can. With the revolving credit, a theoretical loan term is mentioned. That is the term when the credit is taken at the beginning with an up to the limit, the interest does not change and you do not take anything up or make additional repayments.

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