Consumer credit is a loan to an individual to purchase goods and/or services for personal, family, or household use. The person who takes out a loan promises to repay the loan in full, usually with interest, at set dates in the future. The “interest” is a charge added to the original amount of the loan to compensate the lender for the use of its money. There are several different types of consumer credit:
- Revolving credit: a line of credit that can be used up to the set credit limit. As soon as payment is made, that money becomes available to use again. Credit cards and credit lines are both examples of revolving credit. They allow the borrower to “carry” a monthly balance up to the pre-established credit limit. Interest is charged at an Annual Percentage Rate (APR) on the balance until paid in full.
- Installment loan: a loan, sometimes referred to as a personal loan, for a pre-established amount, which is repaid in set monthly installments, plus interest, for the term of the loan. Unlike “revolving” loans, an installment loan does not let you re-use the money you’ve paid back. It can be secured by collateral or unsecured. You must pay the balance in full by the end of the loan’s term.
- Consumer leases: an agreement between you and the lessor that allows you “use” of the item (e.g., apartment, car, furniture, etc.). Much like a loan, a set monthly payment is established. However, at the end of the term’s lease, you usually do not “own” the item. You simply pay for the use of it.
Revolving credit provides you the convenience of not carrying cash. Examples of revolving credit are credit cards and lines of credit. They let you charge purchases up to the established credit limit and they allow you to “delay” payment for the purchase for 30 days. You can choose to pay your bill in full when you receive it or to make at least the minimum payment due. However, finance charges are accrued on whatever amount you do not pay until the remaining balance is paid.
Your decision to use credit should be weighed carefully. Your goal should be to spend no more than you can afford. If you are just beginning to use credit, it would be wise to keep your spending within 10-15% of your take-home pay (net income). Your decision to use credit should be based on your current financial obligations and your financial plans for the future.
Installment loans are usually used to buy “big ticket” items like cars, furniture or appliances. Or, they can be used to pay for expensive services such as school tuition or medical care or to pay off accumulated debts.
Leases are an alternative to loans that usually let you afford more than if you purchased an item directly. The monthly payment can sometimes be less than if you purchased the item using credit. However, once you’ve finished your lease, you do not own the item.
Credit Tips from OneMain Financial:
- Should you use Credit?
- What Type of Credit Do You Need?
- Do you know the warning signs of too much debt?
- What if I can’t pay my bills?
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