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What is a consumer finance company account? Everything you need to know

What is a consumer finance company account
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“Consumer finance” is a broad term for any arrangement where a customer is loaned money so that they can make a purchase. This loan may be to purchase a car, furniture, a holiday, or just to pay utility bills, but it enables that customer to pay for something gradually that they can’t afford to pay at once. While this may sound like a great setup, there are many critics of consumer finance arrangements, and there has even been legislation in some countries to limit its use.

So is using a consumer finance company account a good idea? How do these accounts work? And what are the advantages and disadvantages?

In this article, we will answer these questions and more, so that you have all the information you need to make an informed decision.

What is a consumer finance company account?

A consumer finance company account is a type of account or loan that you can use to make purchases. With this kind of account you don’t have to pay off the whole purchase all at once; instead, your payments will be spread out on an instalment plan and paid in instalments until the entire amount plus the interest has been cleared. Consumer finance is often used by customers to pay for items that they can’t afford upfront. As the customer, you get the benefit of being able to purchase the item now, the seller benefits from being able to sell their item, and the financing company benefits from the interest that is added to the original purchase price.

consumer loan application

What are some different types of consumer finance?

In general terms, all types of bank accounts, credit cards, and loans fall under the umbrella of “consumer finance” but the term usually applies to money that is made available to people to buy something specific.

For example, a furniture store or auto company may have accounts with a financial company which enables their customers to purchase items that they can’t afford to pay for in one go. That company will loan the customer the money or provide them with a credit card to make the purchase and then the customer will pay the money back over a certain amount of time. 

One major criticism of consumer finance in this kind of arrangement is that the customer will end up paying far more for the item in the long run. The annual percentage rate (APR) is often incredibly high. For example, a three piece suite that is on sale for £3,000 could end up costing you as much as £5,000 over ten years with the APR added on.

Another very controversial type of consumer finance is payday loans. These are short-term loans which can be useful for people in emergency situations such as when they desperately need to pay rent or utility bills, or simply make ends meet when they have run out of money. The interest rates on these loans, as well as the extra hidden fees and charges, can be eye-wateringly high. While payday lenders counter this is only the case if the borrower doesn’t make repayments on time, the reality is that these loans are often targeted at borrowers who will never be able to make the payments. This ultimately traps them in a cycle of debt where the interest grows and grows and the borrower never even gets close to paying it off.

What are the advantages of consumer finance?

  • Quick cash without having to wait for a bank account or loan approval.
  • There is often no need to prove your credit history.
  • You can buy something that you can’t afford to pay for upfront.
  • You can get money in an emergency situation.

What are the disadvantages of consumer finance?

  • Consumer finance company accounts like payday loans can be very expensive. You can end up paying triple-digit interest rates and fees for one loan if you’re not careful. 
  • They also encourage people to get into even more debt as it’s easy to take out another loan or make another purchase even though you don’t have the money. 
  • The terms of many consumer finance loans can be very complex with  many added fees and charges essentially hidden in the small print.

How is consumer finance regulated in the UK?

The Consumer Credit Act, first passed in 1974 but amended many times since, governs and regulates consumer credit contracts, payday loans and other types of consumer financing. The act sets out rules for the amount that lenders can provide based on the borrower’s income and restricts what lenders are allowed to do in terms of marketing and advertising. 

For example, the act ensures that your lender needs your permission before they send you unsolicited text messages about their services, and before taking any money from a bank account other than the one linked to their loan agreement with you. 

Why is consumer finance so heavily regulated?

Consumer finance is heavily regulated because of the damage it can do to financially vulnerable people, and the high default rates that result from this kind of borrowing. These loans and accounts may be easy to get, but they often come with exorbitant interest rates that can be very difficult for borrowers to repay. While consumer finance company accounts claim to help people by providing them with a small loan to make a purchase, the reality is that by design or otherwise, desperate people end up in a never-ending spiral of debt escalation and interest payments.

To sum up…

Consumer finance accounts can be a useful way to buy things you can’t afford outright, but it should be avoided unless you’re sure you can make the repayments. Interest rates on these loans may be so high that you can end up in a lot of debt very quickly so it’s vital that you do thorough research before taking out a loan or agreeing to a repayment schedule. Make sure you know exactly how much you will end up repaying so that you can decide whether the purchase is worth that extra money.

 

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