To be easily understood, we will start with a practical example of consumer loans. Consumer credit is what Good Credit offers, for example, when when it gives you the option to finance your purchases in three, six or 12 months. For what, as in any credit, will ask for some conditions. The first, to be a member of your club. The second, prove your solvency. And the third, hire a credit card.
The method of use is easy
You make the purchase in the store, but in reality who is financing you is a banking entity, the financial one (finances customers) of Good Credit. That is, the bank pays your purchase to the Swedish chain and gives you a consumer credit to pay your furniture in installments.
The same happens when we want to finance an installment television in El Corte Inglés (which does have its own financial), or even a sofa in a local furniture store: in most cases there is a third party financial institution behind, giving credits to consumption, to pay our purchases in installments.
In the same way, consumer loans are also those that are requested directly from a traditional bank or an online entity to buy a car, take a trip, change the kitchen, etc.
Regulation of consumer loans
In Spain they are regulated by Law 16/2011, of June 24, on Consumer Credit Contracts, which in its first chapter establishes the following:
- By the consumer credit agreement a lender grants or agrees to grant a consumer credit in the form of deferred payment, loan, the opening of credit or any equivalent means of financing.
- Credit agreements for the purposes of this Law shall not be considered as those that consist in the supply of goods of the same type or in the continuous provision of services, provided that within the framework of those assists the consumer the right to pay for such goods or installment services during the period of its duration.
Consumer loans as a “category” in personal loans, which are “bank products” in which the “customer or borrower” receives a certain amount of money (the loan capital), under the commitment to “return said amount, together with the corresponding interest, by means of periodic payments (installments)”. The main difference of personal loans with mortgages, beyond interest (which are higher in the former), is that their repayment is not guaranteed with any real estate, but with the present and future assets of the debtor.
What usually happens is that the majority of online personal loans are used to purchase goods and services, which is why they are considered consumer loans. The latter, by definition, are always linked to the purchase or contracting of service and “is signed through the entrepreneur who sells the product or offers the service,” as specified in the Consumer Portal of the Community of Madrid.
The definition of consumer loans uses terms similar to those of the law that regulates them, but also leaves professional needs aside and adds an economic minimum so that they can be considered so. According to the entity, consumer loans are “ contracts in which a natural or legal person in the exercise of his business, profession or trade, (an entrepreneur), grants or undertakes to grant a consumer a credit in the form of deferred payment, loan, opening of credit or any equivalent means of financing, to meet personal needs regardless of their business or professional activity and whose amount amounts to at least 200 dollars.
Characteristics of consumer loans
- They are intended for the purchase of consumer goods and services, such as a car, a television, a computer, furniture, etc.
- They are not excessively high (such as mortgages).
- The client or borrower responds to them with their present and future assets, so the lender evaluates and studies their solvency through proof of income (such as payroll), an inventory of assets or an affidavit of their assets.
- Their processing is faster than in mortgage loans, but the interests they carry are higher.
- The consumer understood as “the natural person who acts with a purpose outside his business or professional activity”, is especially protected by law against the behavior of the lender and the information provided (and how he facilitates) the loan. The law places special emphasis on the determination of concepts, such as the total cost of credit and the Annual Equivalent Rate (APR), defining the assumptions in which the former can be modified and indicating the conditions to which said modification must be adjusted.
Where do consumer loans come from?
Consumer loans are not an invention of modern societies, although as they are conceived today it may seem so. The birth of consumer loans dates back to the second half of the 15th century, at which time the first credit institutions with a pledge guarantee emerged: the Montes de Piedad.
As explained in the International Association of Prendario and Social Credit Institutions, it was the Franciscan friars who promoted the creation of ‘Montes Pietatis’ to stand up to Jewish lenders, which before that They were the only ones that gave small consumer loans in exchange for very high interest, which could range from 30% to 200%.
To relieve the peasants, the Franciscans were involved in the creation of these Montes de Piedad, institutions that provided small amounts of cash with a pledge guarantee, without interest, and exclusively for charitable or solidarity purposes. The funds for the loans came from the alms of the faithful and collections.