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dropped to zero the minute you consumed it. In contrast, things bought with non-consumer credit (see below) can increase in value over time . The big benefit of consumer credit is that it gives ordinary people the financial ability to purchase things like meals in nice restaurants, appliances, and other conveniences that improve their quality of life. This financial ability is called purchasing power and it is an important aspect of consumerism , which is a theory that the consumption of goods and services in large quantities is beneficial to a country’s economy. Non-consumer Credit. Non-consumer credit is used to pay for things that build wealth or increase in value over time . For example, a loan to start a business is non-consumer credit because a business will, hopefully, increase in value over time. A home loan is non-consumer credit because a home is considered an investment; the home’s value can go up over time and, generally, does not decline by years of use. Reflect on Learning: What would happen if there were no consumer credit to buy things like cars or household appliances such as refrigerators or washing machines? Answer: You’d have to save up the full price of the item before you could buy it. It could take years to save enough money. In other words, you would have little purchasing power. In the meantime, if you couldn’t afford a car, how would you get to work to earn a paycheck? How would you preserve your food without a refrigerator? Wash clothes with no washing machine? If you ever doubt the importance and power of consumer credit, just imagine life without those conveniences. Without the availability of consumer credit, businesses would fail (or never even start up) due to a lack of demand for goods and service. III. Where Does Credit Come From? Where do loans come from? What organizations make money available for consumers to borrow in order to buy goods or services? Actually, things haven’t changed so much over time. Just like the old days, banks are the main providers of credit . Others are finance companies and, more recently, crowdlending and payday lenders. Banks. The primary providers of consumer credit are banks because banks issue credit cards , which are the most used tool for consumer credit. Banks also provide non-consumer loans for purchasing homes, which we’ll learn more about in a later lesson. Finance Companies. Some companies only provide loans for the purchase of specific products, like cars. In fact, finance companies are often owned by the company that sells the product. For example, car loans are often made by an auto finance company that is a division of the car company. As soon as you decide to make the purchase, the sales person steers you over to the “finance department” so you can apply for a loan. This immediate availability of money encourages and facilitates the purchase of their product or service. The business may advertise “financing available" or "in-house financing provided!” Car dealers, jewelry stores, and solar companies often tout the availability of financing. Payday Lenders. A payday loan is another form of consumer credit. These are short-term loans made at a very high rate of interest . They are also known as cash advance loans . In return for a small cash loan, Chaaaarge!! Credit card debt constitutes the majority of consumer debt in the U.S. Fin Lit Trivia Fin Lit Trivia Fin Lit PRODUCT PREVIEW
Chapter 7 | The Credit Conundrum 118
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