What is consumer lending?

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The consumer lending industry encompasses all the lenders, finance companies, financial institutions, organizations and private individuals that offer loan products to consumers. Consumer lending involves a variety of loan products used for different purposes by individuals. The key element of consumer lending is that the borrower is a private individual. Consumer lending contrasts with commercial lending. Commercial lending involves lending and borrowing money for businesses, companies and organizations.Many lenders, however, offer both commercial and consumer loan products.

Types of consumer lending

Consumer lending covers a broad range and lenders may specialize in one or two financial niches or be broad based in their lending approach and provide many different types of consumer loans. The following are the most common and well-known types of consumer loan categories today:

  • Mortgage loans. Real estate financing for single-family homes, individual condominium units and residential properties with four or fewer units comprise the biggest types of consumer loan programs today. Primarily designed for homebuyers and homeowners, mortgage loans are typically long-term installment loans secured by the mortgage deed to the property. If the borrower defaults on the loan, the lender can initiate foreclosure proceedings to have the property sold (with the foreclosure sale proceeds used to pay off the balance of the mortgage loan).
  • Automobile loans. Similar to mortgage loans, automobile and vehicle loans are secured installment loans that finance the purchase of new and used cars, as well as the refinance of existing of car loans. Auto loans are typically secured by the title to the automobile. Although the borrower keeps control and use of the vehicle, the lender keeps the title to the vehicle until the loan is paid off. If the borrower defaults on the loan, the title allows the lender to quickly repossess the vehicle.
  • Personal loans. Although there are secured variations, the most common types of personal loans are unsecured types of consumer financing. These include payday, cash advance and signature loans, which require no collateral for the loan. These personal loan programs provide borrowers with the loan funds, which are then repaid (with interest) on an installment basis or, in the case of payday loans, in one lump sum. In contrast to these unsecured consumer loan programs, secured personal loans include pawn shop loans and car title loans.
  • Credit cards. Most of today’s credit cards are actually a form of personal financing, but with a revolving or open-ended account. Whereas traditional personal signature loans have structured installment payments, for example, most credit cards allow for fluctuating balances. And the minimum payments due on credit cards are based on the current or average balance on the credit line.

Types of consumer lenders

Depending on their credit and income situations, individuals shopping for consumer loan products today have a variety of lending sources to choose from:

  • Banks. For many borrowers, their bank or depository institution is still the primary source for most of their consumer financing needs, especially mortgage loans and automobile financing.
  • Credit unions. For qualified individuals, credit unions offer a flexible and affordable alternative to traditional banks. Many credit unions are able to provide their members with financial products, including checking accounts, mortgage loans and personal loans, which many of those individuals may not be able to get from traditional banks.
  • Finance companies. Lenders that do not rely on depositors for their source of funds are often called finance or financing companies. These lenders often compete in the same consumer lending space as banks and credit unions, as well as other financing niches that many banks and credit unions avoid.
  • Mortgage companies. Finance companies that provide mortgage loan products are often called mortgage companies.
  • Merchants and vendors. Many retailers and merchants offer credit lines or charge cards to qualified customers. When they provide financing to individual customers in this way, these vendors are providing consumer loan products.
  • Loan brokers. Individuals and businesses that act as intermediaries between borrowers and direct lenders are often called brokers or agents. Loan brokers can help consumers compare various loan programs and lenders, to find the right one. Loan brokers also assist lenders by helping them find suitable customers.
  • Peer-to-peer. One of the oldest forms of consumer lending is peer-to-peer (P2P) or person-to-person lending. Whether it’s a father lending to a daughter or friends lending to each other, P2P lending has been around since the invention of money. Today, the internet facilitate person-to-person lending between people who may have never met.

Each lender uses its own lending guidelines and underwriting criteria. So while some lenders may only want prime borrowers with excellent credit, other lenders may offer more flexibility and accept consumers with less-than-perfect or damaged credit. Regardless of the consumer lending program or source, borrowers need to make sure that they do their due diligence before agreeing to any loan or financing. This includes examining the details of the product, reviewing various options and consulting with a knowledgeable financial advisor.

Due to the multiple types of consumer loans available in the financial marketplace today, it’s important to carefully evaluate the various loan terms issued before agreeing to any consumer loan. Individuals should also shop among various lenders in an effort to get the most favorable consumer loan terms.

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.

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