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Understanding Consumer Credit

Updated on May 15, 2010

Consumer Credit is a lending practice by which a consumer obtains goods, services, or cash for immediate use in return for a promise to repay in the future. If the repayment is made in one lump sum this is called noninstallment credit. If the amount owed is repaid in periodic sums (weekly or monthly and usually in equal amounts), this is called installment credit. When a family head borrows cash from a small-loan company or a bank, it is a consumer credit transaction. The charge accounts that a family has are another kind of consumer credit. Credit for a home purchase may be regarded as consumer credit, but its character is so specialized that most authorities treat it separately.

Consumer credit is used for personal consumption. This distinguishes consumer credit from business credit, which is used for productive purposes.

Consumer credit is largely an American development. Its use can be traced mainly to urbanization, the rise of the working class, the increase of durable goods purchases, and the development of specialized lending institutions. Outside the United States consumer credit is far less important. It has grown mainly in highly developed countries such as England.

Total consumer credit outstanding in the United States increased from about $6 billion in 1945 to about $175 billion 30 years later. About 80% of consumer debt is of the installment type, nearly half of which is used to finance automobile purchases. Noninstallment credit makes up about 20% of total consumer credit. Single-payment loans, charge account credit, and service credit are virtually equal in importance in this category.

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