Consumer lending is an umbrella term that covers all of the different types of loan that an individual would take out. The alternative is commercial lending, which is credit for businesses and other organisations.

Because consumer lending is a broader name for several different areas, knowing what to associate with the term isn’t always straight forward. In fact, consumer lending is the industry name for any type of finance taken by a person — whether that’s a mortgage, credit card, retail credit or car finance.

Since most types of consumer loans aren’t secured, the lender doesn’t require collateral to guarantee the payment. The exceptions, of course, are things like mortgages and car finance.

So how does consumer lending work for each type of consumer loan?

Mortgages

Because a mortgage is the biggest type of loan that the majority of consumers will ever have in their lifetime, and is for such a large amount of money, the process of getting assessed and approved by the lender requires more rigorous checks.

They can also be complex to manage. Depending on the specific type of mortgage, such as a fixed or flexible policy, the repayments need to be regularly recalculated based on interest rates. Arrangements for payment breaks, or managing arrears, complicates things further. So mortgage lenders must use reliable systems to oversee accounts.

Car finance

Motor finance is the other main type of secured consumer borrowing, after mortgages. The difference, of course, being that the loan is secured against the car that the finance is for, rather than against the customer’s house. In most cases, until the debt is paid in full, the car belongs to the lender.

When someone takes out finance on a car, they have various choices of what sort of plan they want — based on deposit, term length and so on. The challenge for lenders here is to guide customers through their options, and make sure that the loan they choose is right for them and their financial circumstances.

Credit cards

Credit cards are the most common type of consumer loan in the UK, and are unsecured. As a revolving credit facility, with no limit on the number of times the customer can borrow up to their credit limit, the flexibility of credit cards is one of the key drivers of a modern economy.

By October 2021, around 59.6 million credit cards had been issued to UK residents, allowing them to borrow enough to pay for anything from a lavish holiday down to their weekly supermarket shop. Their popularity and a wide range of lenders means that, as well as careful management of accounts, each customer’s financial history and current situation must be carefully checked.

Retail credit

Retail credit operates in a broadly similar fashion to a cross between credit cards and car finance. It allows people to pay for big-ticket items in instalments, or to delay the date of payment, for that particular retailer.

Perhaps most recognisable is the “buy now, pay later” deal commonly associated with furniture stores, but there are several different types of service available, for many different types of product. These include 0% finance, where the cost can be evenly spread with no interest; bullet loans, in which the debt can be paid off in a larger lump sum towards the end of the loan period; and the more typical finance with applied interest.

Because the process is provided and managed by external lenders, the retailers themselves largely avoid both the risk and the management. Meanwhile, they benefit from the sales that finance enables customers to buy, which they couldn’t otherwise afford at the time.

The challenge for retail finance providers is to offer attractive finance options, with a high enough level of service, to encourage a retailer’s customers to take that option and buy now, rather than waiting.

Aryza

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