What is a Consumer Loan?

The term “consumer loan” refers to the type of loan extended to consumers to fund
specific items or purposes. Typically, consumers avail of loans for financing home
purchases, debt consolidation, education, general living expenses, etc. On the other
hand, growing small businesses take on loans to fund working capital
requirements, equipment purchase and real estate, inventory purposes, etc. In
short, there is a wide variety of consumer loan products available in the market, and
thus it is important for consumers to understand their own needs before availing of
any of the products. This article will provide a brief understanding of consumer loans
and their different types.

Types of Consumer Loan

There are multiple types of consumer loans available in the market suitable for the
different needs of the consumers. Some of the most common types of consumer loans
are as follows:

1. Mortgage
A mortgage is a secured loan given by a bank to a consumer for buying a house,
which usually costs much more than what an average person earns in a year. This
type of loan is stretched over a longer period of time to ease out monthly
installments, the most common mortgage being a 30-year fixed-rate loan.

2. Auto Loan
An auto loan is either extended by a bank or the car dealer itself to finance the
purchase of a vehicle. The term of a typical auto loan ranges from 2 years to 7 years.
The tenure is shorter, and the down payment is larger for an auto loan due to the
rapid car value depreciation. It is typically secured in nature.

3. Education Loan
The objective of an education loan is to fulfill the education needs of a student by
paying the college/tuition fees. In this way, students are able to pursue their life goals
through proper education. This is an unsecured type of loan, and the repayment only
starts few months after the student’s graduation from college.

4. Personal Loan
A personal loan caters to various day-to-day needs of the borrower. It is the most
versatile type of loan in the consumer loan market due to its wide range of end-use
purposes, including debt consolidation, vacations, etc. This type of loan usually has
a long tenure and can be either secured or unsecured in nature.
5. Refinance Loan
As the name suggests, this type of loan is used to refinance an existing loan. In fact, a
refinance loan can be used to refinance any of the above mentioned loans. Typically,
it has a fixed payment with a lower interest rate, which primarily attracts
consumers.

6. Credit Card
It is the most commonly used and popular among the various types of consumer loans.
A borrower usually uses it to buy daily need items, such as groceries, apparel, etc., on
credit. The rate of interest charged on this type of loan is a bit on the higher side, and
thus failure to pay on time can attract a very high penalty.

To be eligible for a consumer loan, the age of the consumer has to be in the
range of 21 years to 60 years. However, the maximum age of 60 years is
applicable for a salaried person, but that of a self- employed professional can go
up to 65 years. Nevertheless, the criteria can vary from one bank to another, and
various other factors can also kick into the checklist.

Categories of Consumer Loan

Consumer loans fall in either of the two categories – open-end loans and closed-end
loans.

1. Open-end loan
In this type of loan, the borrower can avail of the fund for any purpose but must pay
back a minimum portion of the loan within a certain date. Thus, this type of loan is
also referred to as revolving credit.

2. Closed-end loan
This type of loan is availed for financing some specific purchases. The loan is paid
back by the borrower in equal monthly payments over a period of time, and thus it
is also referred to as installment credit. It is usually secured by collateral, and failure
to pay installments can lead to seizure of collateral.

Uses of Consumer Loan

Some of the most common uses of consumer loans are as follows:

 Purchasing a house or repairing an old house

  Paying tuition fees for higher education
 Purchasing cars for both commercial and private use
 Refinancing existing loan

Benefits of Consumer Loan

Some of the major benefits of consumer loans are as follows:

 First, it offers easy access to funds during times of critical

requirement.
 Second, it enhances financial flexibility with a wide range of
products.
 Third, it is very useful for debt consolidation.
 Finally, consumers are able to purchase items that are
otherwise far beyond their annual earning.

Conclusion
So, it can be seen that consumer loans are used in financing purchases that are
otherwise financially difficult for the borrowers. In fact, many people won’t be able to
purchase a home or a car without consumer loans. Thus, consumer loan is a great
privilege for the people if used with caution.