Word of the Week: Consumer Credit

Word of the Week – Consumer CreditCredit allowing an individual to purchase and/or use a consumer good or service while paying for it over a set repayment period.
Consumer credit is in many countries the fastest-growing financial service, but it doesn’t always receive the most attention in terms of financial inclusion. Consumer credit may be offered by retailers who finance purchases of their merchandise. Financial institutions may offer it in the form of personal loans or credit cards.
Spotlight Fact: Although consumer and micro-loans can look alike in size and be distributed to the same groups of borrowers, they generally differ in several ways:

  • Micro-credit is intended for income-generating entrepreneurial purposes, while consumer credit is meant to aid in purchasing goods. (Despite this, both forms of credit can often be used for different purposes; micro-entrepreneurs may use consumer credit to fuel their business or take out a micro-loan to buy a consumer good. Tracking the end-use of loans is difficult.)
  • Consumer credit is more often given to salaried workers, while traditionally microcredit is extended to households operating in the informal sector.
  • Consumer loans are generally made against collateral. Microloans are not collateralized and require a more hands-on and costly assessment by loan officers to be distributed. (This can explain why consumer credit sometimes tends to grow at a faster rate than micro-credit.)

Although consumer credit is not intended to help develop micro-enterprises, it can play an important role in helping smooth low-income people’s consumption.  At the same time, when consumer credit competes with microfinance (especially in environments where institutions are growing rapidly and credit bureaus do not exist), it can contribute to client over-indebtedness and saddle them with other problems.
Suggested Resource: For a great summary of the dynamics between micro-credit and consumer credit, as well as the risks that arise when blending the two credit types, we recommend: “Consumer Credits for the Poor – Risk or Opportunity?” by responsAbility.
For more financial inclusion terms, please visit the Financial Inclusion Glossary.
For more information on CFI’s Financial Inclusion 2020 campaign, sign up for updates here. 

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