What is a Consumer Loan?

The term “consumer loan” refers to the type of loan extended to consumers to fund specific items or purposes. Typically, consumers avail of loans for financing home purchases, debt consolidation, education, general living expenses, etc.

On the other hand, growing small businesses take on loans to fund working capital requirements, equipment purchases and real estate, inventory purposes, etc. In short, various consumer loan products are available in the market. Thus it is important for consumers to understand their own needs before availing of any of the products. This article will briefly explain consumer loans and their different types.

Types of Consumer Loan

Multiple consumer loan types are available in the market, suitable for the different needs of the consumers. Some of the most common types of consumer loans are as follows:

1. Mortgage

A mortgage is a secured loan from a bank to a consumer for buying a house, which usually costs much more than an average person earns in a year. This type of loan, often a self-employed mortgage, is stretched over a longer period to ease monthly installments, with the most common being a 30-year fixed-rate loan.

2. Auto Loan

An auto loan is either extended by a bank or the car dealer itself to finance the purchase of a vehicle. The term of a typical auto loan ranges from 2 years to 7 years. For most car loans in Townsville, the tenure is shorter, and the down payment is larger due to the rapid car value depreciation. It is typically secured in nature.

3. Education Loan

The objective of an education loan is to fulfill the education needs of a student by paying the college/tuition fees. In this way, students can pursue their life goals through proper education. This is an unsecured type of loan, and the repayment only starts a few months after the student graduates from college.

4. Personal Loan

A personal loan caters to various day-to-day needs of the borrower. It is the most versatile type of loan in the consumer loan market due to its wide range of end-use purposes, including debt consolidation, vacations, etc. This type of loan usually has a long tenure and can be either secured or unsecured. You can use an online personal loan calculator to check estimated monthly payments and determine what works best for your budget.

5. Refinance Loan

As the name suggests, this loan is used to refinance an existing loan. A refinance loan can be used to refinance any of the abovementioned loans. Typically, it has a fixed payment with a lower interest rate, primarily attracting consumers.

6. Credit Card

It is the most commonly used and popular among the various types of consumer loans. A borrower usually uses it to buy daily needed items, such as groceries, apparel, etc., on credit. The rate of interest charged on this type of loan is a bit on the higher side, and thus failure to pay on time can attract a very high penalty.

Examples of Consumer Loan

Let us look at some of the available personal loans as of August 2021.

Lender	Estimated APR	Loan Amount	Min. Credit Score
SoFi	5.99% – 19.63%	$5,000 – $100,000	680
Marcus by Goldman Sachs	6.99% – 19.99%	$3,500 – $40,000	660
Wells Fargo	5.74% – 24.24%	$3,000 – $100,000	–
PenFed Credit Union	5.99% – 17.99%	$500 – $20,000	700

Source: Nerdwallet

Eligibility for Consumer Loan

To be eligible for a consumer loan, the consumer’s age has to be 21 years to 60 years. However, the maximum age of 60 years is applicable for a salaried person, but that of a self-employed professional can go up to 65 years. Nevertheless, the criteria can vary from bank to bank, and various other factors can also kick into the checklist.

If you are unsure whether you meet the eligibility criteria, you can try the personal loan prequalification process to see if you qualify for a loan offer.

Categories of Consumer Loan

Consumer loans fall into either of two categories – open-end loans and closed-end loans.

1. Open-end Loan

In this type of loan, the borrower can avail of the fund for any purpose but must pay back a minimum portion of the loan within a certain date. Thus, this type of loan is also referred to as revolving credit.

2. Closed-end Loan

This type of loan is availed for financing some specific purchases. The loan is paid back by the borrower in equal monthly payments over some time, and thus it is also referred to as installment credit. It is usually secured by collateral, and failure to pay installments can lead to the seizure of collateral.

Uses of Consumer Loan

Some of the most common uses of consumer loans are as follows:

Purchasing a house or repairing an old house
Paying tuition fees for higher education
Purchasing cars for both commercial and private use
Refinancing existing loan

Benefits of Consumer Loan

Some of the major benefits of consumer loans are as follows:

First, it offers easy access to funds during times of critical requirement.
Second, it enhances financial flexibility with a wide range of products.
Third, it is very useful for debt consolidation.
Finally, consumers can purchase items far beyond their annual earnings.

Key Takeaways

Some of the key takeaways of the article are:

Consumer loans are extended to consumers to finance the purchase of specific items or purposes.
The consumer loans allow borrowers to purchase much costlier things than their annual earnings.
The most common types of consumer loans are – mortgages, auto loans, education loans, personal loans, refinance loans, and credit cards.
Consumer loans can be categorized into open-end loans or revolving credit and closed-end loans or installment credit.

Conclusion

So, it can be seen that consumer loans are used in financing purchases that are otherwise financially difficult for the borrowers. Many people won’t be able to purchase a home or a car without consumer loans. Thus, consumer loan is a great privilege for people if used with caution.

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