Consumer Loans and Consumer Credit: Your Essential Guide

Consumer Loans and Consumer Credit: Your Essential Guide

By Lizzy Martini

If you’re thinking of borrowing money to make a purchase or cover a financial emergency, you’ve likely heard about consumer loans and consumer credit—but maybe you’re not sure exactly how consumer loans work, or what the different types of consumer credit are.

 

We’ll cover the basics here—including a straightforward consumer loan definition—and provide information to help you decide which type of consumer loan could be a good fit for your financial needs.

 

What are consumer loans?

All loans involve the transfer of money from a lender to a borrower, with the understanding that the money will be repaid. Borrowers pay interest—a percentage of the borrowed amount—to the lender as compensation for the loan. Loans have a maturity date by which the borrower must repay the funds.

 

The definition of “consumer loan” is based on the recipient of the loan. The borrower is an individual consumer, not a business or other larger organization—loans for those borrowers are commonly called “small business loans” or “corporate financing.”

 

Consumer credit is a related term that more commonly describes the amount of debt taken on by individual consumers. For example, you might read that consumer credit in the US increased 6.7% in 2016 to more than $3.6 trillion of outstanding debt.

 

Types of consumer loans

There are several different ways individuals can borrow money. To guide our exploration of the different types of consumer loans, we’ll divvy up them up based on how long you have to repay the loan.

 

Short-term consumer loans

Payday loan: Repay within a few weeks

Process

  • Apply for a loan from a payday lender online or in person
  • Funds are usually made available the same day, and credit checks are rarely required

Amount

  • Range from $100 to $1,000, depending on the state

Costs and repayment

  • Lenders typically charge a fixed, flat fee based on the amount borrowed
  • You have until your next payday to pay off the amount borrowed plus the fee—all at once

 

Auto title or pawn loan: Repay within 30 days to several months

Process

  • Short-term secured loan that uses your car title or other object of value (e.g., jewelry) as collateral; the lender keeps your collateral until you repay the loan
  • Loans are typically for a few weeks to a few months
  • If you can’t pay back the borrowed money and fees at the end of the period, the lender can repossess your car, or keep whatever item you left as collateral

Amount

  • Depends how much your collateral is worth
  • Auto title loans, for example, are usually for an amount that is 25% to 50% of the car’s value

Costs and repayment

  • Lenders often charge financing fees of up 25% per month, which equals an APR of at least 300%
  • Other fees often apply, like appraisal or storage fees
  • At the end of the period, you’ll have to pay back the borrowed amount plus all fees and charges in one lump sum

 

Credit card: Minimum payment due every 30 days

Process

  • You can continually make purchases (i.e. borrow money) until you reach your credit limit
  • Because you can continuously borrow and make payments, credit cards are considered “revolving” debt

Amount

  • When you apply for a credit card, the issuing company will check your credit history to determine your annual percentage rate (APR) and credit limit
  • Credit limits can range from a few hundred to tens of thousands of dollars, and APRs can range from about 12% to more than 20%; a better credit score will usually land you a higher limit and lower APR

Costs and repayment

  • If you pay back the balance in full each month, you won’t be charged interest
  • If you don’t pay back the full balance, you’ll be charged interest on the remaining amount; credit card interest compounds, so you’ll pay more interest the longer you wait to pay

 

Medium-term consumer loans
 

Personal installment loan: Repay within a few months to a few years

Process

  • Apply for a personal installment loan from an online lender, bank or credit union; lenders will normally check your credit as part of the application process
  • If you’re approved, the money is usually available within a few business days—or sometimes as soon as the next business day
  • Use the money for a variety of reasons, including covering a financial emergency or making home improvements

Amount

  • Range from a few hundred dollars to several thousand dollars, depending on the lender

Costs and repayment

  • Loans have a fixed interest rate and a pre-determined length, anywhere from a few months to a few years
  • You’ll make regularly scheduled payments, usually biweekly or monthly; each payment will be the same amount

 

Auto loan: Repay within three to five years

Process

  • Car serves as collateral; apply for an auto loan from an online lender, bank or credit union
  • Car dealerships also offer financing
  • If you stop making payments on your auto loan, the lender can repossess (take away) your car

Amount

  • Size of your auto loan and the interest rate will be based factors like your credit history, other debts, income, and the type of car you’re buying

Costs and repayment

  • You’ll make monthly payments on the auto loan to cover the principal and interest
  • Most car loans have fixed interest rates and a pre-determined maturity date—usually between three and five years—so your monthly payments will be the same

 

Longer-term consumer loans
 

Student loan: Repay within 10 years

Process

  • Borrow money to cover the costs of education
  • Apply for a student loan from a government program or a private institution, like a bank or credit union; some lenders will check your credit history

Amount

  • Depends on the type of loan; Federal Perkins Loans, for example, are capped at $5,500 per year for undergraduate students
  • Private lenders look at several things to determine how much they’re willing to lend you, including your credit history (or your co-signer’s history) and the cost of tuition

Costs and repayment

  • Often have lower interest rates than other types of loans
  • Generally have fixed interest rates and a set maturity date (typically 10 years), so your monthly payments will be the same amount
  • Many offer borrower-friendly features, like the ability to wait until you’re out of school to start making payments or the option to postpone payments if you’re having financial trouble

 

Mortgage loan: Repay within five to 30 years

Process

  • Used to purchase a home, and the home serves as collateral
  • Apply for a mortgage from an online lender, bank or credit union; the government also manages programs which play a role in the mortgage process
  • If you stop making payments on your mortgage, the lender can foreclose on your home and sell it to try to recoup the unpaid debt

Amount

  • Size of your mortgage and the interest rate will be based on several factors, including your credit history, other debts, income, and the type of house you’re buying

Costs and repayment

  • You’ll make monthly payments on your mortgage to cover the principal and interest
  • Some mortgages have variable interest rates, while others are fixed
  • Mortgage lengths typically vary from five to 30 years

 

At RISE we help you borrow what you need today, and improve your financial wellness for tomorrow. With free access to your credit score, we help you take control of your debt. Apply for a personal installment loan with RISE today.

Next Article: 7 of the Most Common Personal Loan Uses