Understanding Your Consumer Credit Options

As a consumer, there are many types of credit options available to you. Before choosing one, it is important that you understand the terms of the contract, interest and finance charges.

Revolving Charge Account

Unlike a credit card, a charge account is good only at the issuing store. Although you are required to make regular monthly payments, you do not have to pay the whole amount you owe every month. You will be charged interest on the remaining balance as well as a fee if your payment is late.

Retail Installment Contract

With this type of contract, you are buying an item by making a certain number of monthly payments. Part of each monthly payment is used to pay interest and part is used to pay off your balance. You own the item, but it can be repossessed if you default.

The retail installment contract should not be confused with a rent-to-own contract. If you want to use furniture for a short period of time, the rent-to-own option might be for you. Yet, if you are looking to own the item, the weekly payments can add up to a high cost. You do not own the item until you make the last payment.

Signature Loan

These are generally small loans that extend over a brief period of time and do not involve pledging any collateral. Rates can be very high.

Payday Loans

These loans are also called “deferred presentment” transactions. The borrower writes a post-dated check but gets their money right away. The lender agrees not to present the check until its date. The term of the loan is very short (typically the borrower’s next payday) making the interest rate very high.

Pawn Loans

Pawn loans are usually small and secured by collateral held by a pawnbroker. It is important that you are dealing with a reputable pawnshop. Pawn loans are written for a set period of time and at the end of that time, the customer is required to repay the loan in full or forfeit the collateral to the pawnbroker.

Secured Loan

A secured loan is a promise to pay a debt secured by property (collateral) of the debtor. If the loan is not repaid, the creditor can recoup the money by seizing and liquidating the collateral.

Home Equity Loan

These type loans are larger with longer repayment periods. Home Equity Loans are collateralized by your home, which is pledge in case of default. Consumers often use these loans to consolidate their debt or finance a child’s college education.