Question

Identify the various sources of consumer loans.

Answer 1

Consumers can borrow from a number of sources. The most important sources of consumer loans include deposit-type financial institutions, consumer finance companies, sales finance companies, life insurance policy loans, real estate equity loans, friends and family, and pawnshops.

1. Financial institutions :- A financial institution is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange. Financial institutions encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers. Virtually everyone living in a developed economy has an ongoing or at least periodic need for the services of financial institutions.

2. Consumer Finance Company :- A non-bank lender. A consumer finance company does not receive deposits, but does make loans to customers for business or personal use. It derives its profits from the interest on these loans. It is also called simply a finance company.

3. Sales Finance Companies:- Sales finance companies extend credit primarily by purchasing installment loans dealers make to their customers to finance consumer goods and services. In contrast, consumer finance companies - or small loan companies, as they are often called - make most of their loans directly to consumers.

4. Life Insurance Policy Loans:- A policy loan is issued by an insurance company and uses the cash value of a person's life insurance policy as collateral. Sometimes it is referred to as a “life insurance loan”.

5. Real Estate Equity Loans :- A home(Real Estate) equity loan, also known as an “equity loan,” a home equity installment loan, or a second mortgage, is a type of consumer debt. It allows homeowners to borrow against their equity in the residence.

6. Friends and Family :- Consumer Loans can be taken from friends and family. This option is preferred by most of the consumer as the rate of interest is normally very low or nil when this option is exercised. Also the terms and conditions of the loans can be changed/decided by one's comfort.

7. Pawnshops :- A pawn shop is a business that offers loans on items that are not accepted as collateral by traditional banks. Loans amounts are usually determined by an item's market value and are expected to be repaid within a specified time frame.