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What Is a Consumer Loan? Everything You Need to Know

What Is a Consumer Loan?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated May 4, 2022
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A consumer loan is any financial lending product that provides a person with funding or credit for personal, family, or household purposes. Financial institutions can offer consumer loans as open-end credit or closed-end credit.Personal loans, student loans, lines of credit, home mortgages, and car loans are examples of consumer loans. Such consumer lending products may include finance charges, and borrowers are expected to repay consumer loans over a predetermined or flexible period of time.Consumer loans can be secured with collateral or unsecured without pledging any assets as collateral. Below we highlight the broad categories of consumer loans and explain how consumer loans can differ from personal loans.

Is a Consumer Loan the Same as a Personal Loan?

A personal loan is a consumer loan, but a consumer loan is not necessarily a personal loan. As mentioned above, consumer loans can include student loans, lines of credit, home mortgages, and car loans, in addition to personal loans.

What’s the Difference Between a Consumer Loan and a Personal Loan?

The biggest difference between a consumer loan and a personal loan is that consumer loans can include revolving credit. Personal loans are nonrevolving financial lending products that provide borrowers with a lump sum of money and payment schedule for repaying the loan.Consumer loans, meanwhile, can include open-end credit transactions. For example, credit card issuers may provide open-end financing by authorizing credit card transactions. Consumer credit card transactions represent an open-end consumer loan or debt that cardholders must repay.Another difference between consumer loans and personal loans is that consumer loans can take the form of student loans, car loans, and home mortgage loans. Borrowers can use personal loans for almost any purpose, while some consumer loans may restrict how borrowers may use the funds.

Understanding Consumer Loans

Banks, credit unions, savings and loan associations, and private lenders offer consumer loans, including all types of personal loans. As mentioned earlier, a consumer loan is any financial lending product that provides a person with funding or credit for personal, family, or household purposes.A consumer is a person or individual, not an organization. Consumer loans, therefore, are given to private individuals rather than businesses. A consumer loan is simply a consumer lending product that may include loans of money or revolving credit.Consumer installment loans, including car loans, student loans, and home mortgage loans, are examples of consumer loans. Other examples of consumer loans include certain revolving credit products, such as consumer credit cards and personal lines of credit.Getting a consumer loan means you’re a borrower or debtor with a contractual obligation to repay your creditor. Consumer loans can be payable in installments or payable over a flexible period that can include one or more billing statement cycles.Consumer loans may include finance charges or annual percentage rates of interest. A consumer loan may require consumers to repay the principal loan amount and interest charges. Some lenders offer consumer loans with 0% APR.As mentioned earlier, consumer loans can be secured with collateral or unsecured without pledging any assets as collateral. The difference between secured vs. unsecured loans is the former includes a collateral requirement whereas the latter does not.

Secured Consumer Loans

Secured consumer loans can include auto loans secured by the financed vehicle, mortgage loans secured by the financed home, and personal loans secured with collateral. Consumers can pledge a vehicle or deposits in a savings account as collateral on a secured personal loan.You can lose your collateral if you default on a secured consumer loan. For example, homeowners who default on a mortgage loan or home equity loan can lose their home to foreclosure.

Unsecured Consumer Loans

Unsecured consumer loans can include student loans, unsecured personal loans, and any transactions made with an unsecured consumer credit account. Consumers who withdraw funds from an unsecured personal line of credit must repay the consumer loan over time.Making purchases with an unsecured consumer credit card also represents an unsecured consumer loan. Most credit cards are unsecured with no collateral pledged. Defaulting on an unsecured consumer loan can cause a consumer’s credit score to drop drastically.

Open-End Consumer Loan

Open-end consumer loans can include consumer credit card transactions and fund withdrawals from a personal line of credit or home equity line of credit. Consumers can generally make minimum monthly payments when repaying an open-end consumer loan debt.A home equity line of credit, also known as a HELOC, allows homeowners to borrow against the available equity in their homes during a draw period that may run for several years. A HELOC functions as a revolving credit account during the draw period.Open-end consumer loans are revolving credit products that allow consumers to spend or withdraw funds up to a designated credit limit. For example, a consumer with a $5,000 limit on a credit card may spend up to $5,000 on the card. Consumers can replenish or continuously use revolving credit by making repayments on their open-end credit obligations.

Closed-End Consumer Loan

Closed-end consumer loans can include personal loans, student loans, auto loans, home mortgages, and home equity loans. These loans generally require consumers to make regular payments over the life of the loan until the debt is fully repaid.Payday loans are also an example of closed-end consumer loans. A payday loan is generally a small loan of money that may include high fees and repayment terms as short as 14 days.The terms and conditions of a closed-end consumer loan may include a predetermined payment schedule. Some lenders may charge a prepayment penalty fee if consumers decide to pay off their closed-end consumer loan early. The closed-end credit account is effectively closed once the consumer repays the loan in full, including any fees and interest charges.

Common Consumer Loans

Below we highlight some common consumer loans:

Personal Loans

Personal loans provide borrowers with a lump sum of money and payment schedule for repaying the loan. They can be secured with collateral or unsecured, and borrowers can spend the funds on almost any personal expense.There are certain benefits and disadvantages of a personal loan. These consumer lending products can help you build credit, but personal loans in some cases may also carry annual interest rates up to 35.99%. Borrowers are expected to make regular payments on the loan.

Student Loans

Student loans are unsecured closed-end credit products that can help finance a consumer’s postsecondary education. These loans may only be used to cover a college student’s tuition and other school-related expenses.The U.S. Department of Education offers federal student loans through its Direct Loans program, while banks and other lenders may offer private student loans. Federal Direct Loans have fixed interest rates, while private student loans can have variable or fixed interest rates.

Line of Credit

A line of credit is an open-end credit account that allows consumers to withdraw funds from the account for personal spending. Consumers may withdraw funds up to the account’s credit limit.Consumers can get unsecured personal lines of credit or secured personal lines of credit. Homeowners with sufficient equity in their homes may qualify for home equity lines of credit or HELOCs.

Mortgages

Mortgages are a lending product that may provide consumers with financing to buy a home. Consumer mortgages are closed-end consumer loans that promote homeownership, while commercial mortgages for business purposes fall outside the scope of consumer loans.Home mortgages are secured by the financed home. Lenders may offer mortgage loans with 15-year terms or 30-year terms. Some mortgage lenders may offer 10-year terms and 40-year terms.

Car Loan

A car loan is a lending product that may provide consumers with financing to buy a new or used vehicle. Lenders may offer secured and unsecured auto loans. A secured car loan uses the financed vehicle as collateral, whereas unsecured car loans have no collateral requirement.Lenders can offer car loans with terms ranging from one year to more than 85 months. Consumers can get auto loans from banks, credit unions, savings and loan associations, car dealerships, and nonbank financial institutions.

The Takeaway

Consumer lending products can provide borrowers with financing for personal, family, or household purposes. Some consumer loans, however, may include high rates of interest or strict limitations on how consumers may use the funds.Lantern by SoFi can help you compare personal loan rates. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Check your rate today and see if you prequalify.
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The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0222065

Frequently Asked Questions

What is an example of a consumer loan?
What are the differences between commercial and consumer loans?
Are consumer loans the same as personal loans?

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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