Types of Consumer Credit

There at least three basic types of consumer credit:

Noninstallment Credit

This type of credit is the simplest and is usually offered for short term use, such as 30 days. The buyer makes one payment at or before the end of the credit period. This kind of credit enables consumers to take possession of property immediately and pay for it within a short time. Many department stores offer noninstallment credit to their regular customers; this enables the store to make sales and get the money in the near future, thus generating better cash flow for the business than might otherwise occur.

Installment Closed-end Credit

Installment closed-end credit is another form, where only a specified amount of money is lent to the consumer, typically the total purchase price of the goods. This kind of credit is also used by department stores for the sale of large items and by auto dealers for the sale of automobiles. For example, if you purchase a sofa and chairs at a furniture store, the store might give you credit up to the full amount of the sale, which will be repaid with interest, but the store does not make further credit available to you under that agreement. The full amount of the principal and interest must be paid within a pre-determined time period. In this kind of credit the lender usually retains title to the purchased goods until all the payments have been made. If the purchaser defaults on payments, the seller can repossess the property.

Revolving Open-end Credit

This type of consumer credit is found with most credit cards. In this kind of credit the lender extends credit for use by the consumer, with an outside limit that depends on the debtor’s credit history and ability to handle the debt repayment. The financial institution gives the debtor a credit card with a credit limit, such as $1,000, $5,000, or $10,000, and the debtor can choose how much of the available credit s/he will use at any given time. The debtor makes periodic (usually monthly) payments, and continues to use the available credit as needed, as long as each periodic payment meets pre-determined minimum amounts.

Revolving open-end credit requires active management by the debtor. The debtor can decide to pay off the entire outstanding debt when the statement is presented, pay off more than the required minimum payment (but not the entire amount), or simply make the minimum required payment. The debtor thus can determine how much credit will be available to him/her at any given time.

Other credit cards, like travel and entertainment accounts with American Express or Diners Club, may have an open ended amount of credit, but the card holder is expected to pay the balance off each time period, usually each month.

Case Studies: Protecting Consumer Credit – Utilizing Insurance for Financial Security

Case Study 1: Credit Life Insurance

Lisa recently purchased a new car using installment closed-end credit. The total amount financed was $30,000, and she entered into a loan agreement to repay the loan over a period of five years. To protect herself and her family in case of unexpected events, Lisa opted to purchase credit life insurance.

Tragically, a year later, Lisa passed away in an accident. However, due to the credit life insurance policy she had purchased, the outstanding balance on her car loan was paid off in full by the insurance company. This allowed her family to avoid the burden of repaying the loan during a difficult time and ensured the asset remained protected.

Credit life insurance is designed to cover outstanding debts in the event of the insured person’s death. It provides financial security to borrowers and their families, ensuring that their debts are taken care of in the event of a tragedy.

Case Study 2: Payment Protection Insurance

Michael, a self-employed individual, relies heavily on his revolving open-end credit card for both personal and business expenses. To protect himself from potential income loss due to illness or injury, Michael opted for payment protection insurance.

Unfortunately, Michael experienced a severe illness that left him unable to work for several months. As a result, he faced difficulties in meeting his credit card payments. However, his payment protection insurance policy kicked in and covered his minimum monthly payments during the period of his disability, relieving him of the financial burden and protecting his credit score.

Payment protection insurance provides coverage for borrowers who face unexpected events that impact their ability to make loan or credit card payments. It ensures that their minimum payments are covered, giving them peace of mind during difficult times.

Case Study 3: Identity Theft Insurance

Sarah frequently uses her credit cards for online purchases and travels frequently. Recognizing the increasing risk of identity theft, she decided to add identity theft insurance to her homeowner’s insurance policy.

Several months later, Sarah’s identity was compromised, and she became a victim of identity theft. Her personal information was used to open fraudulent credit accounts, resulting in substantial financial losses. However, her identity theft insurance policy covered the expenses related to recovering her identity, such as legal fees, credit monitoring services, and lost wages.

This insurance provided her with the necessary support to navigate the challenging process of restoring her identity and minimizing the financial impact of the theft.