Consumer Credit
| Author | Jeffrey Lehman, Shirelle Phelps |
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Short-term loans made to enable people to purchase goods or services primarily for personal, family, or household purposes.
Consumer credit transactions can be classified into several different classes.
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Installment credit involves credit that is repaid by the borrower in several periodic payments; loans repaid in one lump sum are classified as noninstallment credit. Installment credit has expanded in popularity, with an increasing number of consumers buying goods on credit in order to spread repayment of the purchase price and the interest owed on the principal borrowed over an extended time.
The originator of credit is the person or company who originally extended the credit, while the holder is the individual or business who obtained the debt at a discounted price in order to collect payments at a subsequent time. Auto dealers are credit originators at the time a consumer purchases an auto on credit, but many loans are subsequently assigned by them to banks or sales finance companies, which become credit holders.
Commercial banks buy many consumer installment loans from car dealers and department stores and also participate in all aspects of consumer credit transactions both as originators and holders. The portion of the consumer credit market attributable to banks has greatly increased due in large part to widespread use of bank credit cards.
In addition, two types of finance companies are active in the consumer credit industry. The first type is the small loan company, which has contact with consumers as originators and makes loans to them directly. The other type is the sales finance company, which does not deal directly with consumers; it purchases and holds consumer installment debts related to the sale of durable goods on time. The distinction between the two decreases in importance as consumer finance companies diversify and engage in business on both levels.
The law might regard credit differently, depending on whether it is offered by a vendor (seller). When an appliance store gives credit to customers who buy such items as washing machines and refrigerators and pay for them over a certain period of time, this action is known as vendor credit. When a consumer borrows funds from a finance company to pay for appliances, this action is known as lender credit, since the finance company lends but does not sell.
Some states exempt vendor credit transactions from the provisions of state USURY laws. A vendor or a lender can charge the consumer interest (a fee for the use over time of borrowed money). In the past, usury statutes restricting the legal interest rate have ordinarily been applied only to lender credit. The difference in the treatment of lender credit and vendor credit is based upon the assumption made by law that vendors are able to adjust their prices to allow for the period during which they await payment. If, for example, the vendor's time price was excessive in that it allowed for a high interest rate, then the consumer could opt for payment of the cash price. Courts believe that competitive pricing will prevent vendors from charging too much interest when they extend credit. It is the seller's right to determine how to reduce the time price to encourage consumers to pay cash for goods.
Some courts have found since 1970, however, that these principles have no application to revolving charge accounts because department stores do not charge consumers less for paying for items in cash. There is one uniform purchase price, regardless of whether the sale is a credit or cash transaction. Both finance charges and tax are computed on the basis of the cash price.
In cases where courts have indicated that state usury laws must necessarily be applied in the vendor credit extended through revolving charge account customers, state legislatures have enacted statutes to increase the legal rate of interest that may be charged on such accounts. Most consumer credit cannot exist within the usury law limits; therefore, the pattern has been to enact laws that permit special higher finance rates for vendor credit to consumers.
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