Investopedia defines Consumer Credit as follows:

Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts. For example, a mortgage for purchasing a house is not consumer credit. However, the 52 inch television you put on your credit card is.

This is a nice and comprehensive definition…..

Consumer credit is a big tool in the hands of the seller to cater to your Instant Gratification genes! Why wait for tomorrow if you can do it now – remember the last time you used your Cons Credit to buy a thing you do not need?

Well, before the morals, the facts.

1. Consumer credit is expensive and real: there are many schemes that are announced to sound like it is free. Well to reiterate, there are NO free lunches. When a dealer or a distributor gets say a 20% commission on a product, he needs to sell more to earn more, right? So he gets along with a finance company (or sometimes uses his own money) to encourage people to buy more. So he shares his commission (with the financier)  AND CHARGES you interest by increasing the price.

TO CALL THE BLUFF WALK AWAY AFTER TAKING THE DETAILS. Then OFFER to buy it for full cash down payment, and ask for a discount.

THAT DISCOUNT THAT YOU DID NOT GET IS THE COST OF CONSUMER CREDIT.

2. CC is addicting: if you use Consumer credit once – right from groceries to clothing – it takes a very long time to realize that YOU are living beyond YOUR means.

3. Postponing a purchase or waiting to buy adds to your strength. The power to say NO to your Instant gratification cells in your body, and is good for your health.

 

 

 

 

 

 

 

 

 

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  1. There are several other problems with purchasing consumption goods on credit:
    1. Buying money on credit without actually saving the required money first creates a ‘pull forward demand’ for the product. What this means is, you sell something today what you would have sold tomorrow. When tomorrow comes, that demand no longer exists! But then, if you are an unethical business, you are only interested in padding up the topline in the balance sheet today, right?
    2. When you take credit, the interest payment goes to financiers/lenders, and reduces the savings available for actual consumption later. This further reduces future demand, but then, if you are a financier/lender, your bottomline looks healthy ‘today’, so you encourage this.

    Other observations:
    Government ALWAYS lives beyond its means. Since independence, we have never had a single year with zero deficit or there was a ‘surplus’ with the Govt treasury. This is not only legal, but also ethical. But the same thing, when done at an individual/company level, it is not only unethical, its also illegal (ponzi!)
    Why should savers save today so that Govt. enjoys the benefits today and devalues our savings tomorrow? I would say if you are in an inflation resistant industry (where your salary keeps up or stays ahead of inflation), go right ahead and load up on as much credit as you can.(at favorable terms of course, not at usurious rates of 3.99% per month!)

  2. Agreed with all the points, just sharing my experience which I found surprising.
    About 4 months ago I was looking for a new mobile and there were a lot of EMI schemes going on at that time. I was never interested so never looked into them, as I thought all these schemes would end up costing more money.
    I was shocked to see it was not the case, the 6 and 9 months EMI were exactly price/6 and price/9 respectively i.e. if the cost of mobile is 18000 then 6 months EMI was 3k and 9 months EMI was 2k. When I said I want to buy in cash now, they were not ready to bring down the price from 18000 to even 17900! I even walked out of the store and they didn’t budge.
    I still think cost of wrong habit is more than few hundreds I would potentially save going for EMI route. Still it was reminder that things aren’t as simple as they seem in first place.

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