Sources of Consumer Loans
Suppose you want to borrow money to purchase a new car. Where can you get a loan? Consumers can borrow from a number of sources. The most important sources of consumer loans include deposit-type financial institutions, consumer finance companies, sales finance companies, life insurance policy loans, real estate equity loans, friends and family, and pawnshops.
Deposit-type Financial Institutions
Deposit-type financial institutions include commercial banks, savings and loans associations, mutual savings banks, and credit unions. Such institutions have a ready source of loanable funds: money that has been deposited by savers. Regulators require these institutions to hold a portion of the deposits accepted on hand, but surplus funds can be used to make loans. Commercial banks are that leaders in consumer lending, followed by credit unions, and other savings institutions.
Commercial banks are the most numerous and widespread deposit-type financial institution. At year-end 1994, outstanding consumer installment loans from commercial banks totaled $434 trillion. Commercial banks offer secured and unsecured loans for a variety of purposes, including personal loans, auto loans, home improvement loans, and student loans. Interest rates on commercial bank loans are favorable to borrowers because commercial banks have a ready source of funds (deposits), and commercial banks are selective in granting loans. Although you are not required to be a depositor of the commercial bank where you apply for a loan, some preference is given to regular customers of the bank, especially when the supply of loanable funds is tight.
Credit unions are the deposit-type institution that serves members who have a common bond, such as working for the same employer. Credit unions offer some of the best credit terms available to their members. Credit unions can offer favorable loan terms for three reasons. First, as a deposit -type financial institution, the credit union has deposits on hand from which loans can be made. Second, many credit unions are nonprofit, cooperative entities. Finally, credit unions are characterized by low expenses.
Credit unions concentrate their lending efforts on consumer loans and offer competitive interest rates. At year-end 1994, outstanding consumer installment loans from credit unions totaled $121.7 trillion. Credit unions offer a variety of types of loans, including secured and unsecured loans and single-payment and installment payment loans. Credit unions commonly extend personal loans, auto loans, and home improvement loans. Most credit unions also provide the borrower with “free” credit life insurance.