Consumer finance is a generalized term that refers to credit- and debt-related activities that occur between individual consumers and a lender. This catch-all term can cover almost every issue that relates to a consumer’s personal finances, from credit cards and automobile financing to household budgeting and personal loans.
In the lending industry, consumer finance specifically relates to credit and loans issued to individuals, as well as the terms of the funds being borrowed. The consumer finance lender may be any institution that lends money as a source of revenue (interest and loan fees paid to the lender). Consumer borrowing facilitates the purchase of goods and services on credit, while allowing the consumer to pay back the debt over time. Providing credit to a consumer in a responsible manner helps to fuel the economy and stimulate growth.
Consumer finance covers a wide range of topics including regulatory issues that govern lending activity. Lending activity includes all manner of consumer borrowing from automobile loans and credit cards to home loans and installment loans. This type of finance is in contrast to business or commercial finance where a lending institution lends money to a commercial enterprise for business purposes.
The primary regulatory authority for consumer finance is the Consumer Finance Protection Bureau, or CFPB. The CFPB was established in 2010, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
One of the ways to categorize types of consumer financing issued in the U.S. today is by the collateral required for a loan: secured loans and non-secured loans.
Secured credit refers to a loan or debt that is secured by the borrower’s collateral. The most common examples of secured loans are car loans and mortgage financing. In such cases, the borrower keeps control and use of the collateral property.
However, some types of secured financing requires the borrower to surrender possession of the collateral. For example, pawn loans typically require the borrower to put up an item as security for the loan. Similarly, secured credit cards require the borrower to submit a security deposit for the privilege of having a credit line.
If the borrower does not make the payments as agreed to the lender the lender may seize the asset in addition to collecting the outstanding loan balance. When a loan is paid off completely, the lien is released or the collateral is returned to the borrower.
Unsecured financing refers to an extension of credit where no other collateral is required as a condition of receiving a loan approval. The most common examples of unsecured credit include standard credit cards, student loans and unsecured personal loans.
Responsible lending helps consumers finance certain purchases or provide emergency funds to the borrower when needed. As consumers borrow and repay their loans, they become part of the economic engine called consumer finance that helps finance homes, pay for college and manage a consumer’s overall financial portfolio.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.