Chapter 7, Problem 1LO

Summary Introduction

To discuss: The consumer loan and its different types.

Explanation of Solution

There is a loan that is taken by people to buy the really costly products and they cannot buy those products from their normal income and this type of loan is considered as a consumer loan. This loan is taken to accomplish a long-lasting goal such as funding education fees, purchasing products, or some non-durable products such as funding expensive vacations. Consumer loans have a formal process and also considered as a contract with negotiation under which the borrowing terms and the schedule of the repayment are specified.

Major types of consumer loans

• Auto loans: This type of loan is taken for vehicles such as financing of SUV, car, truck, etc. With this type of loan, approx.80% of the cost of a vehicle can be financed. It is a type of secured loan as collateral is given against the loan.
• Loans for durable goods: This type of loan is taken to finance some costly products such as TV, computer, mobile, etc. The maturity of this loan depends on the type of product purchased from the loan.
• Consolidation loans: This type of loan is taken to repay another credit. This type of loan helps in handling an unhealthy credit situation of a person.
• Education loans: A consumer loan is also taken for the funding of education. This type of loan can be taken by the students as well as parents of the students.

Other types of consumer loans based on repayment of the loan

• Single-payment loans: In this type of loan, the principal and interest amount is paid after a certain period as a lump-sum amount. This type of loan is taken by people to avoid installment based loans.
• Installment loans: In this type of loan, the amount is paid in a series in which a fixed amount is paid on the predetermined dates instead of paying the lump-sum amount.