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What is Consumer Lending?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 26 September 2016
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Consumer lending is the broad term for any type of loan secured by an individual from a financial institution like a bank or some other company that specializes in loans. This differs from commercial lending, which is the practice of banks making loans to businesses. There are many different types of loans offered under the realm of consumer lending, including mortgages, car loans, and credit cards. The basic terms for such loans is that the consumer is given money for his needs up front, knowing that he'll have to pay the loan back, along with interest, to the lender in a specified amount of time.

At one time or another, many individuals are faced with the need for a large amount of capital for a purchase or some personal issue. Whether they need cash to make a down payment on a house or to buy a car or they need to dig out of some personal financial hole, loans are often the only way for them to acquire the desired cash. An entire industry has grown up around the practice of consumer lending, in which a bank or other authorized lender yields money to the consumer until the consumer can pay it back.

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Lenders make their profits from consumer lending in a variety of ways. If the loan is secured, then that means that the borrower has offered up some form of collateral. Should the borrower fail to pay back the loan, then the lender can claim the collateral from the borrower as a form of repayment.

In addition, most consumer loans come with interest attached. This is an amount added to the repayment of the principal that the borrower must pay back to the lender. Interest rates vary by what type of loan is desired, despite whether the loan is secured or unsecured, how long it will take the loan to be repaid, and the credit history of the borrower. Those consumers who have proved in the past that they have good credit and can pay back their loans will generally get better rates from lenders.

Mortgages are a common example of consumer lending, as the borrower makes a down payment on a house and then pays the rest of the house's value, along with interest, in installments. Credit cards are also a form of a consumer loan. Anyone with a credit card is essentially taking out a loan from the credit card company every time she uses the card. Banks or other lenders may also grant personal loans to their customers so that they may use the capital at their discretion.

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