It isn’t always easy to know what your credit score is each day. The numbers can rise and fall with each new report getting added to your profile.
Why is it important to review your credit score and reports regularly? This information lets you know if there are any issues or irregularities associated with your profile.
You can also see if there are consumer finance accounts on your credit report.
What Are Consumer Finance Accounts?
Consumer finance accounts are a type of financing that comes with a specific intention to create an affordable payment. It is a layaway-style account that allows people to purchase something that they wouldn’t normally get because of the cost. Today’s lending products allow for credit to ensure immediate delivery.
A consumer finance account works a lot like a payday loan. It is a subprime lending product that people with often less-than-perfect credit scores use to purchase needed items.
If you have heard of Klarna or have seen interest-free financing options on other e-commerce websites, you’ve encountered a version of a consumer finance account.
Although it is possible for some consumer finance accounts to be interest-free, many of them come with a higher rate because of the risks associated with the buyer.
Consumers can use these accounts to purchase anything that would typically require money or credit. If you’re approved for enough, you can get funding for vehicles, properties, or even businesses.
Anyone who receives a denial letter from a traditional loan can potentially benefit from this product to improve their credit score. It is crucial to be careful when applying for each loan because the terms can be deceptively enticing. Only borrow what you can afford to pay back.
If you take out a loan when money is tight, the issue can lead to more significant problems that hurt your score even more while increasing the debt you owe.
When your goal is to rebuild your credit, this lending product makes sense when used with a clear plan that you can stick to without fail. If not, it might be time to look at other budgeting options to ensure you can get what you need.
What Can I Purchase with a Consumer Finance Account?
Anyone can purchase anything once they’ve been approved for a consumer finance account. In countries where consumerism and consumption are in high demand because that action drives the economy, this financial tool allows for more people to have access to the items they want or need.
Most people use consumer finance lending to purchase durable goods and services that have higher prices. Everyday items in this category include clothing, shoes, kitchen appliances, computers, and televisions.
When the 2022 economic cycle saw 9% inflation start happening consistently, some consumers began to use this lending product to meet their basic needs. The deferred payments were used for fuel, utilities, and groceries.
Some retailers have started allowing consumer finance accounts to pay for impulse purchases.
For most small purchases, the payments stretch to four or five months. If you want a $180 tablet, you could pay $60 for three months instead of the entire amount today.
Larger items, such as vehicles, can have the payments stretch to 72 months. That’s why lenders retain ownership of a car until the loan is paid off in its entirety.
Anyone can request consumer financing without having an entire credit history pulled. When that option occurs, it is sometimes called a “small payments transaction.”
What Are the Pros and Cons of Consumer Finance Accounts?
Consumer finance includes everything from self-service cards to personal installment loans. If you live in a rent-to-own apartment or home, you are participating in the economy with this lending product.
Home mortgages follow a similar pattern, but they’re not typically included in this category because of the industry regulations and nature of real estate for building wealth.
When you’re ready to purchase something that you need, it can be helpful to include a look at the various pros and cons of using consumer finance accounts before finalizing a transaction.
Here is a closer look at the potential advantages and disadvantages of using this lending product.
| Pros of Consumer Finance Accounts | Cons of Consumer Finance Accounts |
| This lending product allows a consumer to use the service or item while still paying for them. There isn’t a need to wait, like layaway, to have enough money saved to complete the transaction. | Unless the financing package is an interest-free offer, the final price of the product or service is considerably higher because of the added costs. |
| These products make it easier for people to shop in stores or online. Many of the retail and credit cards in this segment provide branding benefits that connect individuals to their favorite stores or providers. | The interest rate for consumer finance accounts can be high. It is also variable with some lending products. This information isn’t always given if you don’t ask for it during the application process. |
| This loan can be reported to the credit bureaus, helping consumers to increase their scores while building a favorable history. In time, additional financing opportunities can become available. | Additional costs and fees could be part of the transaction. That includes commissions, insurance costs, account management, and other various expenses. |
| It allows people to access financing relatively quickly without presenting documents or needing collateral to complete the transaction. Many people don’t have access to these items. | The payments can last for so long that, in many situations, the product or service in question is no longer valuable once it comes into the consumer’s possession. Some people trade in items to continue the indebtedness chain for another cycle. |
| You can acquire a broad range of items with this financing, ranging from cars to household items to groceries. | If payments aren’t made as expected, the items financed with them can be seized. That means a consumer could be without a vehicle because the lender hires someone to repossess it. |
| When installments or down payments are necessary to receive this financing, the amounts are typically in the budgetary range of the average household. | It reduces the ability of a consumer to save money, which often leaves families and individuals in a vulnerable state if a financial emergency occurs. |
Although consumer finance accounts aren’t always reported to the credit bureaus when they’re paid on time, this data does go to your report rapidly when missing a payment.
Once you have a damaged credit rating because of an unpaid financing issue, the ability to obtain new financing options for personal or professional spending can be significantly reduced.
Tips to Consider Before Applying for Consumer Finance Accounts
When you need some extra money available to take care of the products or services you want, it helps to consider the following tips to ensure your financing supports your credit instead of hurting it.
- Save – and then Keep Saving. When you promote the habit of saving in different areas of your life, it becomes easier to afford what is required without pursuing the additional debt. You can’t avoid some big purchases at times, but even then, a significant down payment works to keep the monthly obligations down.
- Shop Around. You don’t need to settle for the first option or acceptance offer you receive. Look at different choices to find the best lending situation that fits your current and future needs.
- Calculate the Expenses. Some lending products tell you that you can have $1,000 today, then pay $1,325 to manage your obligation. Calculate what the short- and long-term costs would be between having the item now or waiting to get it when your finances can handle it would debt to see which choice is better.
- Use Infrequently. Consumer finance accounts work better when they’re used for a single purchase. Wait until the payments are handled with that item or service first, then proceed with the next thing you need. If you have several expenses being paid back weekly or monthly, your net income could dip into negative territory.
Although it might be tempting to use financing to keep money in your checking or savings account, try to buy things without going into debt. It’s always better to stop instead of finding a place where you’re getting ahead of yourself.
Weekly and monthly payments often include administrative costs, which aren’t always calculated into the final price.
Add these items together to ensure you can afford everything. It isn’t unusual for the eventual expense to be nearly double what the item or service retails for when paid in its entirety.
Why Do Business Owners Love Consumer Financing?
More businesses are looking for ways to include consumer financing because the risk-reward scenario is such a positive one. When everything is paid back, you get the profit margin from the product or service with a side of extra interest.
If the customer doesn’t pay for the item, you have the opportunity to potentially repossess it. When that choice isn’t available, a business can send it off as bad debt for collections.
Some companies outsource credit checks and payment collection services. Others manage the entire process from start to finish.
The advantages of doing it all make sense if a business has the capital to handle the transaction volumes. Here’s a closer look at why it can be so valuable.
Increased Sales
When a customer wants something and doesn’t have enough money, they typically abandon their shopping cart. That activity can get expensive if you’re operating brick-and-mortar stores. Financing options create another checkout choice that lets people decide on their terms instead of feeling forced into a specific decision.
Consumer Captures
Some businesses have as little as a 5% capture rate for new customers. Existing consumers are much more likely to return for another purchase, especially when they’re satisfied with the value proposition. Adding financing to this scenario makes it even easier to encourage another buy.
Upfront Payment Opportunities
If you use a finance company for these purchases, your business doesn’t need to worry about collecting any money. You get paid immediately. It’s up to the partner organization to collect what is owed. That makes it an almost effortless way to encourage more spending.
Improved Pricing
When you can split a large one-time payment into several smaller ones, it’s easier to get around the hesitancy that sometimes occurs during the checkout process. If something costs $500 today, it feels better to say that it’ll cost $50 today – and for the next nine months, than to put all that cash into something now.
The downside for consumer finance accounts from a business perspective is that it could possibly create a bad debt or increase customer acquisition costs. You might be required to provide you have a certain transaction threshold even to request this service from a third-party provider.
At the end of the day, businesses need to look at the pros and cons of using this service as much as the customers they serve.
Is It Worthwhile to Apply for a Consumer Finance Account?
Consumer finance accounts make sense when someone can afford to pay off an item on a set schedule. Vehicles are often the most expensive item on this list because the average household can’t afford a $25,000 or more purchase immediately. By splitting payments over several months, the expense becomes easier to manage.
Although vehicles are one of the most common items to finance using this method, I took out a big bit of financing for a computer in 1999.
It was a beautiful gaming computer for its time. Everything was state-of-the-art. My $249 monthly payment was a dollar short of what I was paying for rent.
And, like all great gaming enthusiasts of that era, I primarily used it for online poker and blackjack. When necessary, the occasional school assignment was also completed on it.
I had a credit card at the time with a $500 limit. I’d deposit that cash at my favorite casino, wager away, and typically get my money back and then some each month.
One month, I made over $2,500 just playing blackjack.
It took me four years to pay off the computer. Although admittedly, I should have paid off the debt with my winnings, I used it for steak dinners and vacations. When I look back at the pictures from those adventures, they always make me smile.
Was it worth the extra financing costs? Maybe not, from a dollars and cents stance. With everything else happening at the time, it felt like I was financing a moment of peace in a swirling storm of uncertainty.
That’s why consumer finance accounts can feel almost addictive. It’s a quick way to get what you need, and it feels like you’re spending nothing to get it.
If you evaluate the long-term pros and cons, you can make a more informed decision about that car, that motorcycle, or that computer to play online blackjack.
