Family Economics And Consumer Education 3 (2+1)

Lesson 11 :Credit

Consumer Credit

Consumer credit refers to the use of credit for personal needs. Individuals and families of different income groups belonging to different age groups, sex and occupation use consumer credit. Consumer credit is usually used for high valued goods like consumer durables like refrigerators, furniture, car etc. The word credit comes from Latin word “credo” meaning “I believe”.
A merchant will allow a customer to buy goods now but payment is received later on the belief that customer will repay the money later as per his promise.
Basis of credit transactions/ Individuals Credit is determined by four ‘C’s

1. Capacity – Ability to pay
2. Character – Willingness to pay
3. Collateral – Assets
4. Capital

1. Capacity – Ability to pay: Credit reputation is helpful in getting the goods on credit. The ability to pay or capacity of the buyer on credit is considered in selling goods on credit. His income-present or future determines his ability to pay or his capacity to pay. On this basis credit facility can be availed.
2. Character of the buyer on credit is another factor, which can help him in buying goods on credit. A person of doubtful character is not considered for credit sales.
3. Collateral is another factor which decides the credit worthiness of a person. Here the assets possessed by a person like land, house, ornaments etc. entitle him to obtain credit by providing these assets as collateral. [It consists of specific units of capital which are pledged as a security for a loan]
4. Capital: the term capital refers to borrowers net worth assets minus liabilities. A family’s capital is determined by the difference between its owned assets and its liabilities.

The existence of this capital of the borrower works as safety or security for the lenders. Since the family can draw up on its invested capital when the family’s income proves to be inadequate, to pay for its loans taken from others.