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Consumer Credit: Types & Differences

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  • 0:00 What Is Credit?
  • 0:52 Creditworthiness
  • 1:47 Installment Credit
  • 2:58 Non-Installment Credit
  • 3:48 Revolving Credit
  • 4:39 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss creditworthiness and different types of consumer credit: installment, non-installment, and revolving credit. You'll also learn about repayment requirements for each and if there's a cost to borrowing the money.

What Is Credit?

Jan just purchased her first home and moved in today. Her next door neighbor came over to introduce herself and welcome her to the neighborhood. Jan greets her and gives her a tour of the home. Her neighbor asks, 'Where's your furniture?' Jan embarrassingly responds that she used all of her cash to buy the home and will have to buy a little at a time. The neighbor tells her she could use credit to purchase the major furniture items.

Credit allows consumers to take possession of the items with a promise to repay over a specific period of time. Jan visits the furniture store her neighbor suggested and inquires about its credit options. For the rest of this lesson, we'll discuss the three different types of consumer credit: installment, non-installment, and revolving credit. You'll also learn about repayment requirements and if there's a cost to borrow the money.

Creditworthiness

A furniture sales person named Tom greets Jan and asks her to complete a credit application. While she was filling out the application, Tom tells Jan the lenders will review her creditworthiness, or her ability to repay.

They usually review what's called the five Cs of good credit: character, capacity, capital, collateral, and conditions. Character means how long you've been employed and if you pay your bills on time. Capacity evaluates your income and household expenses. Capital equals how much you own minus how much you owe. Collateral represents something tangible the borrower provides the lender in the event of default. Examples of collateral include a deposit, car, and home. Lastly, lenders take into considerations conditions, which include such things as the economy. Now let's review the different types of credit.

Installment Credit

Tom starts by discussing installment credit, which is the best type of credit when a customer wants to furnish the whole house rather than piece by piece or room by room. Installment credit is where the lender provides approval for that particular purchase and credit does not extend beyond that amount. It is not possible to add additional purchases to this type of credit, and once the original amount is paid off, Jan or any other customer must reapply if further credit is needed. The repayment period could extend months or years, depending on the original arrangement.

Additionally, the money is not free. Jan will be required to pay interest on the purchase price. Interest is the cost to borrow money, and it is how lenders make money. Tom explains the interest rate is dependent on how much is borrowed, the repayment period, and the borrower's credit rating. Jan explains to Tom that she just purchased a home, so her credit rating is excellent. Tom says, 'Great, then your interest rate should be pretty low.' Other examples of installment credit are car, mortgage, and student loans. All of these loans represent a single fixed amount of money given at a specified interest rate. Installment credit is not the only option Tom has for Jan, though, so he next talks about non-installment credit.

Non-Installment Credit

Tom asks Jan if she's ever seen commercials on TV advertising 30, 60, or 90 days, same as cash? Jan says yes, but since she does not have much cash after purchasing the home, she's never inquired more about this type of credit. Tom says that it was probably a good idea because non-installment credit requires you to repay in a lump sum payment, usually in a short period of time.

This type of credit may or may not include interest. Sometimes a lender will offer non-installment credit with no interest and if the borrower is unable to pay it off, the lender will switch it to an installment loan with interest. Tom tells Jan she's right; she'll need to build up more cash to use this type of credit and pay it off in full at the end of the borrowing period. However, she may be interested in revolving credit, which he discusses next.

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