Consumer credit has been an important part of the United States economy for decades and continues to be a factor. Since the close of World War II, the U.S. economy has been a consumer driven economy and is reliant on consumer spending. Over time, consumer credit has become an important part of total consumer spending. However, the history of consumer debt has been a growing problem, and it has been tougher for the average person to get loans for major purchases.
Much of the issues surrounding consumer credit have not changed. Lenders continue to look at a person’s credit history to determine the chances of getting paid back. This is important because on large loans there will seldom be enough or any collateral for the loan. This is most commonly seen with car loans. Every lender will have scorecards to determine how much risk an applicant for a loan has. Depending upon the amount of the loan and purpose of the loan, a lender will have different factors that are weighted differently.
Because a certain percentage of borrowers are going to default on a loan, a lender will use all applicable statistics, including experience with customer in the past, to determine if a loan is an acceptable risk. The rules that a lender uses to make this determination are called a credit strategy and are often proprietary. At least proprietary in the sense that these rules for getting a loan are not made available to an applicant.
When the credit strategy of a lender is strong, it is only a matter of collecting accurate data from an applicant and applying it to a scorecard. To a large extent it is a mechanical process; however, when some data is missing an underwriter can be brought in to approve or reject the loan with his own judgment. Sometimes underwriting can be used when a lender wants to expand the number of loans in its portfolio but wants to do it with the least risk possible.
The latest trend in consumer credit is with payday loans. Now legal in more than 35 states, these loans are approved based upon a consumer’s ability to pay them back. There is no collateral for this type of loan. The lender is looking for the applicant to have a steady job. The payday lenders protect themselves from excessive defaults by charging high interest rates, and keeping the total amounts of the loans low. They also keep the term of the loan to less than 30 days