Description
The Survey of Consumer Finances is a triennial statistical survey of the balance sheet, pension, income and other demographic characteristics of families in the United States; the survey also gathers information on the use of financial institutions.
CONSUMER FINANCE
Definition
The term consumer finance refers to the activities involved in granting credit to consumers to enable them to posses goods meant for everyday use. It is known by several names such as credit merchandising, deferred payments, installment buying, hire purchase, pay out of income scheme etc.
Types of credit facilities available to Consumers
Revolving Credit An ongoing credit arrangement similar to bank overdraft, whereby the financier on a revolving basis grants credit is called revolving credit. The consumer is entitled to avail credit to the extent sanctioned as the credit limit.Eg: Credit cards
Fixed Credit It is like term loan whereby the financier provides loan for fixed period of time. The credit has to be squared off within the stipulated period.Eg: Monthly installment scheme, hire purchase.
Cash loan Banks and financial institutions provide money with which the consumers buy articles for personal consumption. Here the lender and the sellers are different. The lender does not have the responsibilities of the seller.
Secured Finance In this type the credit is granted based on particular collateral. The collateral is taken by the creditor in order to satisfy the debt in the event of default by the borrower. The collateral may be in the form of personal property, real property or liquid assets.
Unsecured Loans In this type there is no security by the consumer against the money which is granted by the financial institution.
Sources of Consumer finance The various sources through which consumer finance is available to people is as given below.
Traders The predominant agencies that are involved in the provision of consumer finance are traders they include sales finance corporation, hire purchase and other such financial institutions.
Commercial Banks Commercial bakes take keen interest in providing directly or indirectly the finance for the consumer durables. Banks lend large sums of money at wholesale rate to commercial or sales finance companies, hire purchase concerns and other such financial intermediaries. Recently banks have also started financing directly by giving personal loans which do not demand any security and are cheaper than the hire purchase credit.
Credit card institutions Credit card institutions arrange for credit purchase of articles through the respective banks which issue credit cards. The credit card system allows a person to buy goods and services on credit. The credit card system works as follows.
Credit card presented by buyer
Seller prepares 3 vouchers for buyer, company and seller
The bank credits sellers a/c &debits customer a/c
Sellers bank f/w to credit card issuing company
BFCs Non banking finance companies constitute another important source of consumer finance. Consumer finance companies also known as small loan companies, personal finance companies or licensed lenders are non saving institutions whose prime assets constitute sale finance receivable, personal cash loans to consumers, and short intermediate term business receivables etc. These finance companies charge substantially higher rates of interest than the market rates.
Other Sources 1. Savings and loan association. 2. Mutual savings banks.
Process of Consumer Finance
Merchant
2
Customer
1
1
4 3 Banker/ Financier
Index 1. Contract for financing 2. Sale of Consumer durable 3. Financing for consumer durable 4. Instalment payment
Modes of Consumer finance Consumer finance is available through several ways as shown below
Open Account Open account is a method of consumer financing whereby he retailer allows the consumer to make number of purchases during the month not exceeding a certain value. These are neither a down payment nor any interest charged on such credit. It is the most popular form of credit account.
Credit Card Credit cards are emerging as the most popular mode of consumer finance and slowly replacing paper money. They have brought about a revolution in individual wealth holding.
Revolving Account This is a type of account which allows a customer the facility of making purchase during a month and making payments thereof on a deferred payment basis by easy installments. The consumer is allowed to make fresh purchases since the credit is reduced by the monthly installments. The charge for the credit is calculated as a percentage of the purchase price which us then added to the purchase cost of the article.
Option plan Under this plan a customer has the option of paying the amount mentioned in the statement of account either in full or in part and thus having a balance brought forward. A charge for the credit is calculated as a percentage of the balance outstanding at each month end and asses to the balance.
Installment Account A most popular mode of consumer finance the installment credit is more a sales promotion exercise for the dealers. It has become a permanent part of the business structure in many countries. Under this plan the consumer pays up for the sale of a consumer durable in equal periodical installments.
Cash loan It takes the form of credit being extended in the form of cash. Consumers resort to this plan in order to consolidate the existing dents into one lump sum or for the purpose of purchasing merchandise or services. The period of such loans vary depending on finance companies.
Factors that contribute for the Demand for Consumer finance
1. Increase in consumer disposal income. 2. Enhancement in real income of consumers. 3. Convenient size of the installment payments. 4. Growth in nuclear families leading to spurt in number of households. 5. Lower charges. 6. Down payments and credit contract.
Consumer Finance practice in India Consumer finance in India covers a wide range of products such as TV, Cars, washing machines, refrigerators, geysers, air conditioners, computers etc. The products covered posses a distinct features such as specific indentifiability, durability, and substantiability, repossess ability, sale ability, serviceability and repair ability of the products. An important feature of consumer credit in India is the system of sales tax levied on the sale of products by hire purchase or installments.
Terms of Finance
Eligibility The basic eligibility for consumer finance is the income of the individual and the nature of employment. In addition the tenure of employment of the consumer is also taken into consideration before granting consumer finance.
Guarantee Usually financiers insist on guarantee for the credit availed by the consumer. The guarantors need to have a better income and standing than consumer.
Tenure Consumer finance is granted for a short period of up to 5 years. This again depends on the levels of competition in the market.
Rate of Interest
The effective rate of interest for consumer finance is much higher than the rates applicable to business finance. This is because the loans are granted based on the personal integrity of the consumer.
Other charges In addition to the rate of interest finance companies also charge documentation fees, processing fees, management fees, service charges, brokerage, collection costs etc.
Modes of Payment In case of individual loans payments are usually collected in the form of post dated cheques. In the case of institutional financing there is an arrangement for the deduction of installments from the salary of the employee.
Credit Evaluation A verification of the details furnished by the consumer is carried out in order to ascertain the validity of the statement and credit standing of the consumer.
MARKETING CONSUMER FINANCE
The privilege of availing credit from a retail store is often an attraction to consumers to continue buying from the same store. This results in store loyalty which is advantageous to retailers. In foreign countries companies go to the extent of advertising in such a manner as to convert cash customers into credit customers. Retailers often mail personal letters to attract customers. In the event of promotion campaigning by finance companies, the demand may come both from existing customers with additional credit needs and also from new customers. '
Care is always taken by companies to adopt a policy of efficient credit collection, without sacrificing the quality of accounts. Of late the consumer credit industry has started paying attention to new graduates and the newly shifting families. Similarly finance companies also collect the addresses of new tenants from building societies or real estate agents. As the salaried class constitutes most reliable credit customers, finance companies exert great efforts to get tie-
ups with employers or employee co-operative societies, in order to meet their regular credit demands.
Consumer Finance Insurance
It is a common practice in countries like the United States to grant credit insurance in respect of finance to consumers. This is kind of insurance is called "consumer credit insurance". The insurance provides for coverage in the eventuality of consumer default in installment payments. The premium for such insurance is usually collected from the customers.
Case for Consumer Finance
Consumer finance plays an important role in the mass production and distribution of consumer durables such as motor cars, TV sets, typewriters, radios, sewing machines, electrical appliances and many other goods. Offering credit is a great convenience to consumers. Further credit has come to occupy an important place in the modern competitive market. It is used as a selling device and also as an ideal method of sales promotion. A case in point is the wide usage of credit cards. Credit cards are a tool of modern credit play a key role in many western countries, enabling consumers to purchase a wide variety of goods and services. Following arguments given in favor of consumer finance
a. Enjoying Possession An important benefit of consumer credit is that it allows people to enjoy the possession of goods without having to pay for them immediately. The user does not have to wait and save money for purchasing a dream product.
b. Compulsory Saving Consumer credit allows for a mechanism of compulsory saving. This has the effect of inducing people into using their income more wisely. It promotes thrift among people and enables people with limited means to acquire goods.
c. Convenient mode
Consumer credit through the open account system offers a convenient mode of acquiring consumer durables.
d. Meeting emergency
Consumer credit is useful in meeting emergencies such as illness, accident and death which involve unexpected expenses. This also helps save the esteem of the consumer in dire circumstances.
e. Maximization of revenue
Consumer credit failitates speedy disposal of goods which would have remained unsold in the absence of a credit facility to consumers. Credit induces more business. This is quiet true with regard to non- essential or luxury goods such as motor cars, trucks, fridges, typewriters, tv sets, all kinds of electrical appliances, sewing machines, etc., it is therefore possible for the manufacturers and dealers to secure ever increasing sales and profits through credit sales.
f. Realization of dreams
Consumer credit is a boon for a consumer who can enjoy the possession of goods without paying for them immediately. The installments can be conveniently paid spread over a fixed future period. Consumers are in a position to budget for the purchase of even expensive capital items out of their regular fixed and limited income. For instance it is quite possible for a newly married couple to establish an ultra modern lifestyle and enjoy all the modern amenities of life by acquiring goods immediately, without waiting for the accumulation of savings.
g. accelerates industrial investments
Consumer credit accelerates investment in the consumer durable industry, ultimately giving rise to growing levels of income and employment. The facility of credit sales makes it possible to acquire goods of high and lasting value which are otherwise beyond the purchasing power of the middle and the lower income classes.
h. enhanced living standard
The facility of credit enables people of even limited means to acquire articles to enhance their general standard of living at an accelerated pace.
i. promoting economic developments
The facility of consumer credit promotes higher levels of investment, employment and income, thus raising the effective level of demand. All this result in industrial prosperity and employment multiplication. Thus the economy is able to achieve higher standards of growth and development.
j. Exportation
Credit sale in the form of deferred payments is a boon to small scale manufacturers and producers. The enhanced sales pave the way for exportable surplus, which in turn induce the industrial development. This ultimately contributes to the economic growth of developing countries.
k. Effective stock Management
Consumer credit facliltates quick disposal of surplus stock even during a period of depression. This helps prevent accumulation of stocks and ensures stable production. Better inventory turnover ratio maximizes sales and minimizes cost.
i. Large Scale Production
Consumer credit is responsible for causing production on a large scale basis. This eventually makes it possible to price goods at a lower rate. This in turn engineers efficient delivery of product in the mass market.
j. Protection Against Inflation
With inflation becoming a permanent phenomenon, prices of all goods rise every year. Consumer credit serves as an effective antidote against such rising prices as it is possible to acquire goods without paying cash for the full price, resulting in consumers saving expenses in two ways. Firstly, the evil effects of inflation are warded off and secondly, the effective cash outflow and future installment payment is less because of depreciated money value.
ATIO AL IMPORTA CE
Consumer credit is a great boon to the modern economy. Credit greatly facilitates sales and distribution of capital goods which are indispensable to the modern economy. Consumer credit keeps the wheels of industry running smoothly thus contributing to industrial and economic development.
Case against consumer finance
Despite the fact that consumer credit for costly and durable goods is convenient and beneficial to all parties concerned, one must guard against excessive or indiscriminate credit demands. Consumer credit suffers from the following drawbacks
•
Thoughtless Buying
• • • • • •
Insolvency Costly credit (as the effective rate of interest is much higher) Risk to traders Artificial boom Bad debt risk Economic insatiability
HIRE PURCHASI G (HPS)
Definition The mode of acquiring ownership of consumer durables by individuals and productive assets by manufacturers, whereby the payment for the product is conveniently spread over a period of two or three years, is known as 'hire purchase system'. Hire purchase serves as a convenient tool of credit in situations where it is difficult to save in advance to make the purchase of expensive articles but find it easier to make regular payment, weekly or monthly, after they receive the article.
Characteristics
Following are the characteristics features of hire purchasing:
1. Popular method- hire purchase is the most popular method used for the sale of expensive and durable goods on credit
2. Retention right- in hire purchase, the seller sells on credit to buyers, the security being the seller's right to retain property rights on the goods sold
3.
Installments- the hire purchase price is paid in installments spread over a fixed period
4. Ownership- the property rights in goods sold remains with the seller, and the buyer gets legal ownership of the article only after the payment of the last installment.
5. Agreement- the hire purchase transaction takes place through a formal written agreement signed by the seller and the buyer.
6. Possession- the buyer is given possession of the goods on payment of the first rental amount in cash known as down payment.
7. Default- when the buyer defaults, i.e., fails to either pay the specified installments or insure the article in accordance with the terms of contract, the seller has the right to terminate the hire purchase agreement and take re-possession of the article. Is the agreement is terminated because of default, the hirer of the buyer will have no claim to amount already paid, since that amount is already treated as rental charges.
8. no beach of trust- under the hire purchase agreement, the buyer simply hires the article. The buyer cannot commit any criminal breach of trust. If the buyer does so, and manages to sell the article, the seller can recover article from the sub-buyer, since there is no transfer of ownership.
Hire purchase agreement
The hire purchase agreement serves as the basis of hire purchase financing. Following are some of the features of the agreement:
a. Formal agreement- it is a formal agreement between a seller and a buyer, under which the seller agrees to transfer possession of an article to the buyer.
b. Document- it is a document that sets out the terms and conditions on the basis of which goods are sold on credit. It also sets out payment schedule spead over a fixed future period. c. Property- the property ownership right for the goods passes from the seller to the buyer only when the last installment is paid and only where the buyer fulfills all the terms of agreement, d. Owner- the seller if the owner of the goods, right up to the payment of the last installments. Therefore the seller can take possession of the article sold in the event of failure to pay the installments.
Advantages of hire purchase system
Hire purchase financing is an ideal mode of consumer and industrial credit in many countries. Presently, it has become a recognized method of doing business whenever it involves the sale of durable and high-price goods. Hire purchasing finance offers the following advantages:
a. No immediate cash- hire purchase finance helps asset creation without having to immediately part with the cash b. Easy possession- the hire purchase financing system helps individuals of limited means to realize their dreams by facilitating the possession of the article c. Economic growth- hire purchase finance helps th growth of the economy by engancing, incestiment and sales. In addition, the mass sale of expensive and durable goods also contributes to employment generation. it helps mass production and accelerates industrial development and economic growth d. Thrift- hire purchase indicates/ forces the saving habit on the buyer so that it becomes possible to pay installments without default. e. Relief to buyer- it relieves the buyer of arranging for loans and advances which eventually involves a financial burden to pay for the asst. it is considered to be advantageous especially for the small sector farmers and industrialists.
Disadvantages of hire purchase system
a. available only to reputed buyers b. induces mindless, indiscriminate and lberal purchases which may lead to bankruptcy c. buyer has to mortgage his/her future income d. danger of buyer losing property during depression, as the value of the property diminishes e. danger of buyer having to lose even the paid installments in the event of default f. higher price thus making the purchase, an expensive proposition g. loss to seller in the event of default by the buyer, which may result in the seller having to re- possess an article which may not fetch much market value
Hire Purchase Cost
Hire purchase finance is a lucrative form of financial investment. Although the field appears speculative, it provides a high interest of income to traders. In fact, traders earn double the nominal interest rates. Under the various systems of consumer credit, interest is calculated on the nominal rate that is added to the cash price of the asset purchased. The amount of installment is determined by dividing the purchase price with the number of months of credit provided by the trader. Interest liability remains the same throughout the period of credit as interest is calculated on fixed cost price of the asset.
For traders, the higher installment price is justified on the frount that there is an inherent risk of default and repossession, and the article not fetching a price sufficient to pay for the unpaid installments.
Eligibility
Consumer credit, such as hire purchase and installment purchase etc is suitable for individuals who meet the following criteria:
a. persons with regular and stable income, and capacity to pay installments from the current income b. persons must be competent to enter into a contract and hence, a minot is not eligible for such sales c. foreigners and persons having no permanent residence in the country are disqualified for such credit sales d. persons having no settled or established life at one place are not allowed such credit sales
Installment Credit System( ICS)
Definition
A system of consumer financing, whereby the payment of purchase price is deferred, to be paid in reasonable installments, is known as 'installment credit system;
Features
The installment system, which is a modified hire purchase sale, has the following features, a. An ordinary sale of goods with easy payment system b. The buyer obtains ownership and possession on payment of the first installment
c. No possibility of the article sold being returned to the seller, since sale is complete immediately after the execution of the agreement d. No possibility of the article sold being returned to the seller, since sale is complete immediately after the execution of the agreement e. Seller has no right to recover possession of the goods even if the buyer commits a default in the payment of outstanding installments and there is no question of forfeiture of paid installments against default. However, he is entitled to recover his dues with the help of the court
HPS & ICS
Similarities a. They are forms of consumer finance for the sale of expensive and durable goods b. They are recognized by the Indian Sale of Goods Act c. Recovery of the price is through installments spread over a fixed period of time d. Both deliver rich dividends in times of prosperity, but suffer heavily during depressions
Suitability
a. Separate identity or individuality to facilitate their recovery when there is a default b. Durability to sustain the long period of installments and facilitate re-possession in the even of a default c. Portability to facilitate re-possession in the even of a default d. High enough value to justify a hire purchase agreement e. Standard specifications to facilitate reselling, if necessary f. Stable value and good yield, or a sufficient profit margin
The system of HPS & ICS is suitable for goods tht help to pay for themselves such as furniture, radio & TV sets, refrigerators, etc
Safeguards The following factors should be considered when granting credit for hire purchase or installment sale:
a. Perishability of goods b. Capital resources of the trader for investment c. The three Cs of the buyer's financial and moral character, capacity and capital d. Degree of competition to be met and stability of trade e. Duration of credit, a shorter period when business is brisk and a longer period during the slack season, with the usual period ranging from five to seven or ten years
HPS vs. ICS
S.No. 1.
Feature Actual sale
HPS Hp becomes
ICS an The payment of first is
actual sale only on installment the payment of last sufficient to make ic installment 2. Legal ownership an outright sale
The buyer obtains Buyer obtains both possession without ownership ownership until the possession last payment installment immediately the agreement after is and
executed and first installment is paid to the seller 3. Hirer/ owner Buyer s merely Buyer is rightful
hiring the article, owner on payment and hence is not its of fist installment real owner 4. Right to sewll Hire purchases Buyer can sell the
cannot sell until last article at any time hire charge is paid 5 Legal protection The seller gets Buyer maximum protection of the law gets
maximum protection of law 6. Default
Buyer loses both the No risk of loss to artivle ant the entire buyer amount paid if there default is default even on
7.
Seller's ownership
The seller can get The seller cannot back the ownershio repossess but has
and 8. Bad debt
possession
if remedy,
can
sue
there is a default
buyer in the court
Limited rish of bad High risk of bad debts debts
doc_555844992.docx
The Survey of Consumer Finances is a triennial statistical survey of the balance sheet, pension, income and other demographic characteristics of families in the United States; the survey also gathers information on the use of financial institutions.
CONSUMER FINANCE
Definition
The term consumer finance refers to the activities involved in granting credit to consumers to enable them to posses goods meant for everyday use. It is known by several names such as credit merchandising, deferred payments, installment buying, hire purchase, pay out of income scheme etc.
Types of credit facilities available to Consumers
Revolving Credit An ongoing credit arrangement similar to bank overdraft, whereby the financier on a revolving basis grants credit is called revolving credit. The consumer is entitled to avail credit to the extent sanctioned as the credit limit.Eg: Credit cards
Fixed Credit It is like term loan whereby the financier provides loan for fixed period of time. The credit has to be squared off within the stipulated period.Eg: Monthly installment scheme, hire purchase.
Cash loan Banks and financial institutions provide money with which the consumers buy articles for personal consumption. Here the lender and the sellers are different. The lender does not have the responsibilities of the seller.
Secured Finance In this type the credit is granted based on particular collateral. The collateral is taken by the creditor in order to satisfy the debt in the event of default by the borrower. The collateral may be in the form of personal property, real property or liquid assets.
Unsecured Loans In this type there is no security by the consumer against the money which is granted by the financial institution.
Sources of Consumer finance The various sources through which consumer finance is available to people is as given below.
Traders The predominant agencies that are involved in the provision of consumer finance are traders they include sales finance corporation, hire purchase and other such financial institutions.
Commercial Banks Commercial bakes take keen interest in providing directly or indirectly the finance for the consumer durables. Banks lend large sums of money at wholesale rate to commercial or sales finance companies, hire purchase concerns and other such financial intermediaries. Recently banks have also started financing directly by giving personal loans which do not demand any security and are cheaper than the hire purchase credit.
Credit card institutions Credit card institutions arrange for credit purchase of articles through the respective banks which issue credit cards. The credit card system allows a person to buy goods and services on credit. The credit card system works as follows.
Credit card presented by buyer
Seller prepares 3 vouchers for buyer, company and seller
The bank credits sellers a/c &debits customer a/c
Sellers bank f/w to credit card issuing company
BFCs Non banking finance companies constitute another important source of consumer finance. Consumer finance companies also known as small loan companies, personal finance companies or licensed lenders are non saving institutions whose prime assets constitute sale finance receivable, personal cash loans to consumers, and short intermediate term business receivables etc. These finance companies charge substantially higher rates of interest than the market rates.
Other Sources 1. Savings and loan association. 2. Mutual savings banks.
Process of Consumer Finance
Merchant
2
Customer
1
1
4 3 Banker/ Financier
Index 1. Contract for financing 2. Sale of Consumer durable 3. Financing for consumer durable 4. Instalment payment
Modes of Consumer finance Consumer finance is available through several ways as shown below
Open Account Open account is a method of consumer financing whereby he retailer allows the consumer to make number of purchases during the month not exceeding a certain value. These are neither a down payment nor any interest charged on such credit. It is the most popular form of credit account.
Credit Card Credit cards are emerging as the most popular mode of consumer finance and slowly replacing paper money. They have brought about a revolution in individual wealth holding.
Revolving Account This is a type of account which allows a customer the facility of making purchase during a month and making payments thereof on a deferred payment basis by easy installments. The consumer is allowed to make fresh purchases since the credit is reduced by the monthly installments. The charge for the credit is calculated as a percentage of the purchase price which us then added to the purchase cost of the article.
Option plan Under this plan a customer has the option of paying the amount mentioned in the statement of account either in full or in part and thus having a balance brought forward. A charge for the credit is calculated as a percentage of the balance outstanding at each month end and asses to the balance.
Installment Account A most popular mode of consumer finance the installment credit is more a sales promotion exercise for the dealers. It has become a permanent part of the business structure in many countries. Under this plan the consumer pays up for the sale of a consumer durable in equal periodical installments.
Cash loan It takes the form of credit being extended in the form of cash. Consumers resort to this plan in order to consolidate the existing dents into one lump sum or for the purpose of purchasing merchandise or services. The period of such loans vary depending on finance companies.
Factors that contribute for the Demand for Consumer finance
1. Increase in consumer disposal income. 2. Enhancement in real income of consumers. 3. Convenient size of the installment payments. 4. Growth in nuclear families leading to spurt in number of households. 5. Lower charges. 6. Down payments and credit contract.
Consumer Finance practice in India Consumer finance in India covers a wide range of products such as TV, Cars, washing machines, refrigerators, geysers, air conditioners, computers etc. The products covered posses a distinct features such as specific indentifiability, durability, and substantiability, repossess ability, sale ability, serviceability and repair ability of the products. An important feature of consumer credit in India is the system of sales tax levied on the sale of products by hire purchase or installments.
Terms of Finance
Eligibility The basic eligibility for consumer finance is the income of the individual and the nature of employment. In addition the tenure of employment of the consumer is also taken into consideration before granting consumer finance.
Guarantee Usually financiers insist on guarantee for the credit availed by the consumer. The guarantors need to have a better income and standing than consumer.
Tenure Consumer finance is granted for a short period of up to 5 years. This again depends on the levels of competition in the market.
Rate of Interest
The effective rate of interest for consumer finance is much higher than the rates applicable to business finance. This is because the loans are granted based on the personal integrity of the consumer.
Other charges In addition to the rate of interest finance companies also charge documentation fees, processing fees, management fees, service charges, brokerage, collection costs etc.
Modes of Payment In case of individual loans payments are usually collected in the form of post dated cheques. In the case of institutional financing there is an arrangement for the deduction of installments from the salary of the employee.
Credit Evaluation A verification of the details furnished by the consumer is carried out in order to ascertain the validity of the statement and credit standing of the consumer.
MARKETING CONSUMER FINANCE
The privilege of availing credit from a retail store is often an attraction to consumers to continue buying from the same store. This results in store loyalty which is advantageous to retailers. In foreign countries companies go to the extent of advertising in such a manner as to convert cash customers into credit customers. Retailers often mail personal letters to attract customers. In the event of promotion campaigning by finance companies, the demand may come both from existing customers with additional credit needs and also from new customers. '
Care is always taken by companies to adopt a policy of efficient credit collection, without sacrificing the quality of accounts. Of late the consumer credit industry has started paying attention to new graduates and the newly shifting families. Similarly finance companies also collect the addresses of new tenants from building societies or real estate agents. As the salaried class constitutes most reliable credit customers, finance companies exert great efforts to get tie-
ups with employers or employee co-operative societies, in order to meet their regular credit demands.
Consumer Finance Insurance
It is a common practice in countries like the United States to grant credit insurance in respect of finance to consumers. This is kind of insurance is called "consumer credit insurance". The insurance provides for coverage in the eventuality of consumer default in installment payments. The premium for such insurance is usually collected from the customers.
Case for Consumer Finance
Consumer finance plays an important role in the mass production and distribution of consumer durables such as motor cars, TV sets, typewriters, radios, sewing machines, electrical appliances and many other goods. Offering credit is a great convenience to consumers. Further credit has come to occupy an important place in the modern competitive market. It is used as a selling device and also as an ideal method of sales promotion. A case in point is the wide usage of credit cards. Credit cards are a tool of modern credit play a key role in many western countries, enabling consumers to purchase a wide variety of goods and services. Following arguments given in favor of consumer finance
a. Enjoying Possession An important benefit of consumer credit is that it allows people to enjoy the possession of goods without having to pay for them immediately. The user does not have to wait and save money for purchasing a dream product.
b. Compulsory Saving Consumer credit allows for a mechanism of compulsory saving. This has the effect of inducing people into using their income more wisely. It promotes thrift among people and enables people with limited means to acquire goods.
c. Convenient mode
Consumer credit through the open account system offers a convenient mode of acquiring consumer durables.
d. Meeting emergency
Consumer credit is useful in meeting emergencies such as illness, accident and death which involve unexpected expenses. This also helps save the esteem of the consumer in dire circumstances.
e. Maximization of revenue
Consumer credit failitates speedy disposal of goods which would have remained unsold in the absence of a credit facility to consumers. Credit induces more business. This is quiet true with regard to non- essential or luxury goods such as motor cars, trucks, fridges, typewriters, tv sets, all kinds of electrical appliances, sewing machines, etc., it is therefore possible for the manufacturers and dealers to secure ever increasing sales and profits through credit sales.
f. Realization of dreams
Consumer credit is a boon for a consumer who can enjoy the possession of goods without paying for them immediately. The installments can be conveniently paid spread over a fixed future period. Consumers are in a position to budget for the purchase of even expensive capital items out of their regular fixed and limited income. For instance it is quite possible for a newly married couple to establish an ultra modern lifestyle and enjoy all the modern amenities of life by acquiring goods immediately, without waiting for the accumulation of savings.
g. accelerates industrial investments
Consumer credit accelerates investment in the consumer durable industry, ultimately giving rise to growing levels of income and employment. The facility of credit sales makes it possible to acquire goods of high and lasting value which are otherwise beyond the purchasing power of the middle and the lower income classes.
h. enhanced living standard
The facility of credit enables people of even limited means to acquire articles to enhance their general standard of living at an accelerated pace.
i. promoting economic developments
The facility of consumer credit promotes higher levels of investment, employment and income, thus raising the effective level of demand. All this result in industrial prosperity and employment multiplication. Thus the economy is able to achieve higher standards of growth and development.
j. Exportation
Credit sale in the form of deferred payments is a boon to small scale manufacturers and producers. The enhanced sales pave the way for exportable surplus, which in turn induce the industrial development. This ultimately contributes to the economic growth of developing countries.
k. Effective stock Management
Consumer credit facliltates quick disposal of surplus stock even during a period of depression. This helps prevent accumulation of stocks and ensures stable production. Better inventory turnover ratio maximizes sales and minimizes cost.
i. Large Scale Production
Consumer credit is responsible for causing production on a large scale basis. This eventually makes it possible to price goods at a lower rate. This in turn engineers efficient delivery of product in the mass market.
j. Protection Against Inflation
With inflation becoming a permanent phenomenon, prices of all goods rise every year. Consumer credit serves as an effective antidote against such rising prices as it is possible to acquire goods without paying cash for the full price, resulting in consumers saving expenses in two ways. Firstly, the evil effects of inflation are warded off and secondly, the effective cash outflow and future installment payment is less because of depreciated money value.
ATIO AL IMPORTA CE
Consumer credit is a great boon to the modern economy. Credit greatly facilitates sales and distribution of capital goods which are indispensable to the modern economy. Consumer credit keeps the wheels of industry running smoothly thus contributing to industrial and economic development.
Case against consumer finance
Despite the fact that consumer credit for costly and durable goods is convenient and beneficial to all parties concerned, one must guard against excessive or indiscriminate credit demands. Consumer credit suffers from the following drawbacks
•
Thoughtless Buying
• • • • • •
Insolvency Costly credit (as the effective rate of interest is much higher) Risk to traders Artificial boom Bad debt risk Economic insatiability
HIRE PURCHASI G (HPS)
Definition The mode of acquiring ownership of consumer durables by individuals and productive assets by manufacturers, whereby the payment for the product is conveniently spread over a period of two or three years, is known as 'hire purchase system'. Hire purchase serves as a convenient tool of credit in situations where it is difficult to save in advance to make the purchase of expensive articles but find it easier to make regular payment, weekly or monthly, after they receive the article.
Characteristics
Following are the characteristics features of hire purchasing:
1. Popular method- hire purchase is the most popular method used for the sale of expensive and durable goods on credit
2. Retention right- in hire purchase, the seller sells on credit to buyers, the security being the seller's right to retain property rights on the goods sold
3.
Installments- the hire purchase price is paid in installments spread over a fixed period
4. Ownership- the property rights in goods sold remains with the seller, and the buyer gets legal ownership of the article only after the payment of the last installment.
5. Agreement- the hire purchase transaction takes place through a formal written agreement signed by the seller and the buyer.
6. Possession- the buyer is given possession of the goods on payment of the first rental amount in cash known as down payment.
7. Default- when the buyer defaults, i.e., fails to either pay the specified installments or insure the article in accordance with the terms of contract, the seller has the right to terminate the hire purchase agreement and take re-possession of the article. Is the agreement is terminated because of default, the hirer of the buyer will have no claim to amount already paid, since that amount is already treated as rental charges.
8. no beach of trust- under the hire purchase agreement, the buyer simply hires the article. The buyer cannot commit any criminal breach of trust. If the buyer does so, and manages to sell the article, the seller can recover article from the sub-buyer, since there is no transfer of ownership.
Hire purchase agreement
The hire purchase agreement serves as the basis of hire purchase financing. Following are some of the features of the agreement:
a. Formal agreement- it is a formal agreement between a seller and a buyer, under which the seller agrees to transfer possession of an article to the buyer.
b. Document- it is a document that sets out the terms and conditions on the basis of which goods are sold on credit. It also sets out payment schedule spead over a fixed future period. c. Property- the property ownership right for the goods passes from the seller to the buyer only when the last installment is paid and only where the buyer fulfills all the terms of agreement, d. Owner- the seller if the owner of the goods, right up to the payment of the last installments. Therefore the seller can take possession of the article sold in the event of failure to pay the installments.
Advantages of hire purchase system
Hire purchase financing is an ideal mode of consumer and industrial credit in many countries. Presently, it has become a recognized method of doing business whenever it involves the sale of durable and high-price goods. Hire purchasing finance offers the following advantages:
a. No immediate cash- hire purchase finance helps asset creation without having to immediately part with the cash b. Easy possession- the hire purchase financing system helps individuals of limited means to realize their dreams by facilitating the possession of the article c. Economic growth- hire purchase finance helps th growth of the economy by engancing, incestiment and sales. In addition, the mass sale of expensive and durable goods also contributes to employment generation. it helps mass production and accelerates industrial development and economic growth d. Thrift- hire purchase indicates/ forces the saving habit on the buyer so that it becomes possible to pay installments without default. e. Relief to buyer- it relieves the buyer of arranging for loans and advances which eventually involves a financial burden to pay for the asst. it is considered to be advantageous especially for the small sector farmers and industrialists.
Disadvantages of hire purchase system
a. available only to reputed buyers b. induces mindless, indiscriminate and lberal purchases which may lead to bankruptcy c. buyer has to mortgage his/her future income d. danger of buyer losing property during depression, as the value of the property diminishes e. danger of buyer having to lose even the paid installments in the event of default f. higher price thus making the purchase, an expensive proposition g. loss to seller in the event of default by the buyer, which may result in the seller having to re- possess an article which may not fetch much market value
Hire Purchase Cost
Hire purchase finance is a lucrative form of financial investment. Although the field appears speculative, it provides a high interest of income to traders. In fact, traders earn double the nominal interest rates. Under the various systems of consumer credit, interest is calculated on the nominal rate that is added to the cash price of the asset purchased. The amount of installment is determined by dividing the purchase price with the number of months of credit provided by the trader. Interest liability remains the same throughout the period of credit as interest is calculated on fixed cost price of the asset.
For traders, the higher installment price is justified on the frount that there is an inherent risk of default and repossession, and the article not fetching a price sufficient to pay for the unpaid installments.
Eligibility
Consumer credit, such as hire purchase and installment purchase etc is suitable for individuals who meet the following criteria:
a. persons with regular and stable income, and capacity to pay installments from the current income b. persons must be competent to enter into a contract and hence, a minot is not eligible for such sales c. foreigners and persons having no permanent residence in the country are disqualified for such credit sales d. persons having no settled or established life at one place are not allowed such credit sales
Installment Credit System( ICS)
Definition
A system of consumer financing, whereby the payment of purchase price is deferred, to be paid in reasonable installments, is known as 'installment credit system;
Features
The installment system, which is a modified hire purchase sale, has the following features, a. An ordinary sale of goods with easy payment system b. The buyer obtains ownership and possession on payment of the first installment
c. No possibility of the article sold being returned to the seller, since sale is complete immediately after the execution of the agreement d. No possibility of the article sold being returned to the seller, since sale is complete immediately after the execution of the agreement e. Seller has no right to recover possession of the goods even if the buyer commits a default in the payment of outstanding installments and there is no question of forfeiture of paid installments against default. However, he is entitled to recover his dues with the help of the court
HPS & ICS
Similarities a. They are forms of consumer finance for the sale of expensive and durable goods b. They are recognized by the Indian Sale of Goods Act c. Recovery of the price is through installments spread over a fixed period of time d. Both deliver rich dividends in times of prosperity, but suffer heavily during depressions
Suitability
a. Separate identity or individuality to facilitate their recovery when there is a default b. Durability to sustain the long period of installments and facilitate re-possession in the even of a default c. Portability to facilitate re-possession in the even of a default d. High enough value to justify a hire purchase agreement e. Standard specifications to facilitate reselling, if necessary f. Stable value and good yield, or a sufficient profit margin
The system of HPS & ICS is suitable for goods tht help to pay for themselves such as furniture, radio & TV sets, refrigerators, etc
Safeguards The following factors should be considered when granting credit for hire purchase or installment sale:
a. Perishability of goods b. Capital resources of the trader for investment c. The three Cs of the buyer's financial and moral character, capacity and capital d. Degree of competition to be met and stability of trade e. Duration of credit, a shorter period when business is brisk and a longer period during the slack season, with the usual period ranging from five to seven or ten years
HPS vs. ICS
S.No. 1.
Feature Actual sale
HPS Hp becomes
ICS an The payment of first is
actual sale only on installment the payment of last sufficient to make ic installment 2. Legal ownership an outright sale
The buyer obtains Buyer obtains both possession without ownership ownership until the possession last payment installment immediately the agreement after is and
executed and first installment is paid to the seller 3. Hirer/ owner Buyer s merely Buyer is rightful
hiring the article, owner on payment and hence is not its of fist installment real owner 4. Right to sewll Hire purchases Buyer can sell the
cannot sell until last article at any time hire charge is paid 5 Legal protection The seller gets Buyer maximum protection of the law gets
maximum protection of law 6. Default
Buyer loses both the No risk of loss to artivle ant the entire buyer amount paid if there default is default even on
7.
Seller's ownership
The seller can get The seller cannot back the ownershio repossess but has
and 8. Bad debt
possession
if remedy,
can
sue
there is a default
buyer in the court
Limited rish of bad High risk of bad debts debts
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