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What is Retail Lending?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 December 2016
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Retail lending is the term used to describe any type of loans that are issued to individual consumers rather than to businesses or other types of institutions. Considered the most common type of loan activity in the world, bank to consumer lending is managed by a number of different types of lenders, including banks, credit unions, mortgage companies, and savings and loan associations. The loans issued by these institutions may be secured, meaning that some sort of collateral is pledged for the duration of the loan. At other times, the loans are unsecured, meaning that no collateral was required by the lender.

One of the most common examples of retail lending is the home mortgage. With this arrangement, qualified individuals are able to obtain the financing necessary to purchase a residence. While qualifications will vary from one lender to another, even in the same nation, most will require that the loan applicant have a steady income of a minimum amount, have a reasonable debt to income ratio, and possess a credit rating that is over a certain amount. Home mortgages are normally secured loans, in that the home being purchased with the mortgage is held as collateral until the note is retired in full.

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Other types of retail lending include the issuance of loans for a wide range of financial needs. Loans for vehicle purchases are also very common, with the acquired vehicle serving as collateral for the loan. Individual consumers may also obtain loans to aid with settling medical debts, making home repairs, or even as the means to finance a vacation. Depending on the nature of the loan and the credit rating of the individual, some of these loans may not require any collateral, and are granted as unsecured loans.

In recent years, a newer form of retail lending has emerged. Known as a payday loan, this type of unsecured loan helps to provide a quick influx of cash in the event of an emergency. Typically, the loan is scheduled for repayment in full within a week or two, and carries a higher rate of interest than some other types of laws. In some jurisdictions, lawmakers have enacted legislation that places a cap on the amount of interest payday lenders can apply to the loans, although those interest rates are still much higher than loans obtained from more traditional lenders. For the most part, retail lending of this type should be viewed as for emergency purposes only, and when the funds needed to retire the debt can reasonably be expected to be in hand before the loan is due.

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Melonlity
Post 2

@Vincenzo -- That is not true for unsecured loans, however. Consumers should watch out for those things, by the way. Think about credit cards. Those are unsecured so the interest rate on them is murder because of the risk the credit card company takes. If the borrower goes bankrupt or defaults on the loan, then there is no property for the lender to take back and sell. Hence the higher interest rates on unsecured loans.

Vincenzo
Post 1

Apparently, the need for these types of loans arose from a time when pawn shops were about the only avenue for personal loans. Seeing how these types of loans work, that is not hard to understand. The borrower puts up collateral to secure the loan much as someone brings something to a pawn shop and lets the store take it into inventory to secure a loan.

A major difference is that people can still access and enjoy their property that secures a personal loan. Things never work out that way with pawn shops.

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