A consumer finance account is a type of financing created with the explicit intention of creating an affordable payment structure.
They are suited to people who:
- wish to purchase something they otherwise would not be able to afford, and
- have poor credit history (due to previous payment delinquencies or debt collection issues) and therefore are unable to acquire loans through traditional means
Consumer finance accounts are often short-term, high-interest loans which are easy to acquire but can often be extremely difficult to repay.
What are examples of consumer finance accounts?
Store credit accounts
A consumer may wish to purchase furniture from a furniture chain, for example, but has no cash or credit available to make the purchase.
The store may offer an in-house financing option to the customer. This type of finance account is sometimes referred to as “rent to own” and provides very low monthly payments but a very high interest rate.
This option can be found in any number of consumer goods stores which cater to lower income clientele, from tires to appliances to jewelry.
Another type of in-store consumer finance account is an actual credit line, often backed by a big name bank like Wells Fargo or Chase.
For consumers with good enough credit, the credit line is approved for the immediate purchase, but remains open after the initial balance is paid.
Although similar to a typical consumer credit card, these credit lines are sometimes more restrictive.
This is the most common type of consumer finance account and offers short term loans with an extremely high interest rate.
As the name implies, their purpose is to assist customers who are running short on cash between paydays. The amount borrowed is typically $500 or less.
While they offer immediate solutions to cash-strapped customers, it comes at great cost with annual percentage rates commonly running between 300% and 600%.
This type of consumer finance account is a close counterpart to the no-collateral payday loan.
Typically, a customer can qualify for one if:
- they need more money than a small payday loan can provide, and
- they own their car free and clear
These loans are typically written for 25-50% of resale value.
While the interest rates may not reach the same heights as payday loans, they are still extremely high with some annual percentage rates close to 300%.
Additionally, the vehicle title would be held by the title loan business. Failure to pay will result in repossession of the vehicle, the loan being charged off, and the lender keeping a hold on the title.
How do consumer finance accounts work?
The purpose of consumer finance accounts is to provide financing for those who may otherwise struggle to secure traditional loans.
Alternatively, they exist to provide funds for people who do not have immediate access to cash or personal credit.
Terms and interest rates vary, but they will all have the following in common:
- high interest rates
- initial payment affordability, and
- ease of approval
The structure of these loans is such that monthly payments often do not cover monthly accrued interest. Therefore, the loan balance is always increasing.
It is less detrimental to pay the balance in full as soon as possible. The longer it takes to pay off, the more exponentially expensive it becomes.
Will a consumer finance account impact credit score?
If the consumer finance account is being provided by a business that reports to credit reporting agencies, then yes, it would negatively impact your credit score, albeit relatively minor.
Typically, if you monitor your FICO credit score, the following statement may be provided, “You have a consumer finance account on your credit report”.
This serves as an indication to banks and credit providers that you pose a higher risk on defaulting on payments as a result of having an unfavorable credit history.
In the event that a consumer finance business does not report to the credit reporting agencies, the associated accounts will not impact credit score either negatively (i.e. creating a drop in score when this new credit account is opened) or positively (i.e. establishing payment history).
Remember, as long as you are punctual and never late with payments, this will actually do more good than harm to your credit report.
However, the activities that will likely be reported as a notice of public record on the borrower’s credit report would include:
- the customer defaults on a cash loan by failing to make payments as agreed
- if collateral (vehicle, furniture, etc) is repossessed due to lack of payment.
These would have a negative impact on your credit score.
How long do consumer finance accounts stay on my credit report?
Typically, reports from agencies such as Experian and Transunion will retain the fact that you’ve owned a consumer finance account in your credit report for 7-10 years.
This retention period will begin from the moment the balance has been paid in full and the account is closed.
The agencies will report that “You have a consumer finance account on your credit report”, but this will only have minimum impact on your credit score.
If you have been diligent with the repayments associated with your consumer finance loans, your ability to dramatically improve your credit score should not be limited.
How do I remove a consumer finance account from my credit report?
Removing the fact that you own or have owned a consumer finance account from your credit report may be achieved in the following ways.
Wait out the retention period of 7-10 years
The majority of the time, having a history of consumer finance loans in your credit report does little damage to your credit score.
You should have no problem working towards a better credit score as long the following are met:
- Paid your loan on time every month
- Paid your balance in full
- Closed your account
If you have not met points 2 and 3, it is best to pay off the balance, whatever the amount, and then close it for good.
Chances are, credit agencies will more than likely recognize and acknowledge this by indicating that any effect your consumer finance account may have on your credit score will be dramatically reduced.
Eventually, the consumer finance company will cease to report your account each month.
Contact the consumer finance company
In rare cases, you haven’t been reckless with your repayments, paid your full balance and closed your account, yet 10 years have passed and the stain of the consumer finance account still remains in your credit report.
The consumer finance company continues to report that you still have a consumer finance account in your name.
To resolve, contact them to initiate a dispute and request to immediately stop further reporting, accompanied with any supporting documents you may have.
The oversight is typically due to human carelessness and contacting them will most likely prompt them resolve it.
Dispute any associated derogatory statement
As stated in the previous section, the fact that you have owned a consumer finance account will not significantly impede your credit score.
However, the only reason to consider removing it is when a derogatory statement associated with the account is included in your credit report, which has a more negative impact to your credit score.
The derogatory statement would most likely be due to consistent late payments and/or other behavior associated with credit misuse.
In such circumstances, contact the business to determine if they are willing to delete the account. If they are not willing, it is only possible to follow the dispute process.
How are consumer finance accounts different from a bank or credit union loan?
Banks and credit unions are regulated at both the state and federal levels. Whereas, payday lenders are only regulated at the state level.
Depending on the state, inadequate requirements for loan disclosures may put borrowers at greater risk.
Banks and credit union interest rates and loan terms are more favorable to the consumer, and loan approval is based on consistent requirements and consumer protections.
How do I know the consumer finance company is legitimate?
Due to required state regulation of payday loan businesses, consumers can research audit results on state websites as well as business ratings and consumer reviews.
Because state regulations require full rate and term disclosure both in person and online, consumers can know before they sign.
Often the longevity of a business speaks to its commitment and necessity within the local community.
Also, many consumers still rely on word of mouth regarding these local businesses.
Is it a good idea to get a title loan?
Title loans are very common and, in many respects, the same as offering a car title to a bank or credit union as collateral for a loan.
The car title remains safe in so much as the business is reputable and the consumer pays as agreed.
However, most businesses that offer title loans are far more aggressive at reclaiming collateral than traditional banks or credit unions if a borrower defaults.
It is important to remember though that title loan companies were not established for the sole purpose of repossessing your car.
Their existence is ironic to the fact that they target individuals in financial stress with products known to have high interest rates and inflexible terms.
If you cannot avoid a title loan, ensure that you negotiate the terms, interest rate, balloon payment and exit fees, before committing.
How do I get out of a title loan?
As with any creditor, it is best to communicate as soon as trouble arises.
Because consumer finance businesses are often locally owned, they will sometimes have flexibility to rewrite loan terms by refinancing.
However, unlike a bank or credit union, payday and title loan lenders will often do so with an expensive penalty to the consumer.
Remember, the disclosure documents provided online or in person include the loan term and interest rate.
To sign them without first reviewing the documents makes no difference in obligation to pay. The interest rate and other contract terms are non-negotiable thereafter.
Why are payday loans so bad?
The unfortunate reality is that these loans meet a real need. They are designed for people desperate for funds yet have a history of being incapable of properly handling credit.
Despite the exorbitant interest rates and sometimes daunting loan terms, consumer finance businesses provide an option for low-income individuals and those without credit history, people whom traditional lenders consider high risk.
Being poor at handling finances and then being given access to quick funds is an unlikely combination, one which typically leaves the individual worse off.
The irony of this is that payday loan businesses have the lowest default rates within the national lending landscape, and high customer loyalty.
For all the negative press, the number of operating businesses increases annually with the national payday loan volume of $18.2 billion in 2021.