To be easily understood, we will begin with a practical example of consumer credit. A consumer credit is what Ikea offers, for example, when it gives you the option to finance your purchases in three, six or 12 months. For what, as in all credit, will ask for conditions. The first, be a member of your club. The second, prove your solvency. And the third, hire a credit card.
The method of use is easy: you make the purchase in the store, but in reality who is financing you is a banking entity, the financial one (finances the clients) of Ikea. That is, the bank pays your purchase to the Swedish chain and you give a consumer credit to pay your furniture in installments .
The same thing happens when we want to finance a TV in installments in El Corte Inglés (which does have its own financial), or even a sofa in a local furniture store: in most cases there is a foreign financial institution behind, giving credits to the consumption, to pay for our purchases in installments. In the same way, consumer loans are also those that are applied directly to a traditional bank or an online entity to buy a car, take a trip, change the kitchen, etc.
Regulation of consumer loans
In Spain, they are regulated by Law 16/2011, of June 24, on Consumer Credit Contracts, which in its first chapter establishes the following:
- By the consumer credit agreement a lender grants or undertakes to grant a consumer a credit in the form of deferred payment, loan, opening of credit or any equivalent means of financing.
- Credit contracts for the purposes of this Law shall not be considered those that consist in the supply of goods of the same type or in the continued provision of services, provided that in the framework of those services the consumer assists the right to pay for such goods or services. installment services during the period of their duration.
For its part, the Bank of Spain (BdE) understands consumer credit as a “category” within personal loans,which are “banking products” in which the “customer or borrower” receives a certain amount of money (the capital of the loan), under the commitment “to return said amount, together with the corresponding interest, through periodic payments (installments)”. The main difference of personal loans with mortgages, beyond interest (which are higher in the first), is that their return is not guaranteed with any real estate, but with the present and future assets of the debtor.
What usually happens is that most personal loans are used for the purchase of goods and services, which is why they are considered consumer loans. The latter, by definition, are always linked to the purchase or contracting of a service and “is signed through the employer who sells the product or offers the service”, as specified in the Consumer Portal of the Community of Madrid.
In the case of the BdE, the definition of consumer credits uses terms similar to those of the law that regulates them, but also leaves professional needs aside and adds a minimum economic level so that they can be considered as such. According to the entity, consumer loans are ” the contracts in which a natural or legal person in the exercise of its commercial activity, profession or trade, (an employer), grants or undertakes to grant a consumer a credit in the form of deferred payment , loan, opening of credit or any equivalent means of financing, to satisfy personal needs regardless of their business or professional activity and whose amount goes upat least 200 euros . “
Characteristics of consumer loans
- They are used to purchase consumer goods and services, such as a car, a television, a computer, furniture, etc.
- They are not of an excessively high amount (like mortgages).
- The client or borrower responds to them with their present and future assets, so the lender evaluates and studies their solvency through proof of income (such as a payroll), an inventory of assets or an affidavit of their assets .
- Its processing is faster than in mortgage loans, but the interests that come with it are higher.
- The consumer, understood as “the natural person who acts with a purpose unrelated to his business or professional activity”, is especially protected by law against the behavior of the lender and the information that facilitates (and how it facilitates) the loan. The law places special emphasis on the determination of concepts, such as the total cost of credit and the Annual Equivalent Rate (APR), delimiting the assumptions in which the former can be modified and indicating the conditions to which this modification must be adjusted.
Where do consumer loans come from?
Consumer loans are not an invention of modern societies, although as they are conceived today may seem. The birth of consumer loans dates back to the second half of the 15th century, when the first credit institutions with pledge guarantees emerged in the north of Italy: the Montes de Piedad.
As explained in the International Association of Pledge and Social Credit Entities (pignus.org), it was the Franciscan friars who promoted the creation of ‘Montes Pietatis’ (Montes de Piedad) to stand up to the Jewish money lenders, who before that date were the only ones that gave small credits to consumption in exchange for very high interest, which could range from 30% to 200% .
To relieve the peasants, the Franciscans were involved in the creation of these Montes de Piedad, institutions that lent small amounts of money in cash with pledge guarantee, without interest, and exclusively for charitable or solidary purposes. The funds for the loans came from alms of the faithful and collections.
The origins of the credits to the consumption go back to the birth of Montes de Piedad, in the second half of the XV century
Considering the business that the credits to the consumption could suppose, the Pope Leon X legitimized the payment with interests in 1515. From then, the Montes de Piedad began to charge small interests that guaranteed their institutional survival. And soon after they expanded into Catholic territory, while in the countries of Anglo-Saxon tradition the Frugality Bank, Banks of Charity and similar institutions did, which substituted religious ends for philanthropy and foresight.
However, it was not until the twentieth century, especially with the arrival of the automobile, that the installment sales in consumer durables skyrocketed. First it was in the United States and then in Europe, until in the second half of the twentieth century saw the need to legislate consumer credit.