Consumer Credit

Canadian consumers obtain consumer credit whenever they purchase goods or services on account, or whenever they borrow funds to finance purchases already made. The most common type of consumer credit arrangements involve cash loans, usually to finance retail purchases on instalments. In addition, cash loans to consolidate existing debts and unpaid balances on CREDIT CARDS constitute important proportions of the total amount of consumer credit - with the latter representing about 20% of the total. While the goods purchased on credit are usually large items such as household furnishings and cars, increasingly consumers are using credit cards to purchase gasoline and other non-durable goods. By the mid-1990s, consumer credit arrangements of all types accounted for about 26-27% of all the personal indebtedness in Canada. Over 90% of these credit balances were owed to financial institutions, while the remainder were owed to retail vendors.

Today, with over two-thirds of the market, the predominant suppliers of consumer credit in Canada are the banks, either through instalment loans carried directly on their own books or through the credit-card plans they operate. Mortgage and TRUST COMPANIES also provide consumer credit, although they are a much smaller proportion of the total consumer credit market. CREDIT UNIONS and CAISSES POPULAIRES are also important suppliers of consumer credit, but these institutions deal exclusively with their members and have traditionally offered loans at lower rates than those charged by other financial institutions. Consumer loan and finance companies are financial intermediaries specializing in the provision of both consumer credit and the wholesale financing of consumer durable goods. Some firms of this type, known as acceptance companies, are owned by automobile or other manufacturers. Many large retailers also own and manage finance companies to serve the credit needs of their customers.

Finance companies have declined in importance since 1955. At that time, they accounted for over 30% of the consumer credit market; now their share is approximately 7%. Life-insurance companies also provide consumer credit by means of policy loans - loans to policyholders secured by the cash value of their life-insurance policies.

Apart from credit unions and caisses populaires and some mutually owned life insurance companies, the suppliers of consumer credit are profit-oriented firms. These lenders will extend credit, if it is profitable, to any class of client, but are reluctant to extend credit to clients whom they regard as presenting either a low potential for profit or a higher than normal risk. Consequently, disadvantaged minorities sometimes find it difficult to obtain consumer credit because lenders regard these borrowers either as less profitable or more risky. Because credit unions and caisses populaires are co-operative organizations founded on a self-help principle, they will sometimes extend consumer credit in situations where the other lenders are unwilling. Also, within limits defined in their policies, life-insurance policy loans are made at the sole discretion of policyholders.

The principal advantage of credit is that it allows consumers to purchase and use an item before they have the funds to pay for it completely. Through consumer credit, goods or services can be obtained with someone else's money for a price, ie, INTEREST. Borrowers determine the size of monthly payments by choosing the terms of the loan. From time to time, concern has been expressed by consumer groups and politicians about the level of credit card interest rates and their apparent insensitivity to changes in other interest rates. Calls to regulate card rates have, however, not been acted upon.

A second advantage of using consumer credit is that responsible borrowers have the opportunity to establish a good credit rating, making it easier for them to obtain credit for future dealings. The principal disadvantage of consumer credit is that some persons are tempted to borrow more than their earning power allows them to repay readily, with the result that they can become so heavily indebted that they have difficulty in meeting the instalment payments on their loans.