Consumer financial products (CFPs) are money management tools provided by financial institutions and other creditors to consumers. They include installment loans, revolving lines of credit, payment methods, and bank accounts.
CFPs are not the same as consumer financial services (CFS) because CFSs use products to perform transactional support. For example, a bank account (product) facilitates transferring money (service).
CFPs are also not the same as credit builder products (CBP). CBPs are a subset of CFPs and consist of select products from CFP categories, such as credit builder loans and secured credit cards. CBPs exclude debit payment methods because debit transactions do not create debt, unlike credit transactions.
Publications¹ from the Consumer Financial Protection Bureau (CFPB) provide a framework for classifying CFPs and CFSs. This article uses that framework and adds critical products that were left out, such as credit builder cards, in order to outline a comprehensive range of CFPs available in the market.
What is "consumer" finance?
Consumer finance is a branch of finance concerned with people and money rather than organizations and money. It includes income, expenses, debt, credit ratings, investing, and transaction methods.
What is a consumer finance account (CFA)?
A CFA is a term given to store credit cards, dealer loans, and other kinds of financing provided by sellers to aid a purchase. They are considered high risk because the consumer hastily resorts to financing for the simple purchase of goods rather than investigating other options.
CFAs are important in credit reporting, and they're one of the items we discourage in our DIY program.
Summary
Consumer financial products fall under four categories:
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Installment Loans (jump to section ↓)
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Revolving Lines of Credit (jump to section ↓)
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Banks Accounts (jump to section ↓)
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Payment Methods (jump to section ↓)
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Bonus: Credit builder products (jump to section ↓)
#1 Installment Loans
An installment loan is a debt agreement in which a lender provides a lump sum of money (called principal) that the borrower pays back in installments over a fixed period.
Defining characteristics of installment loans include duration, interest rate, APR, collateral and principal amount.
Traditional installment loans distribute the principal amount at the start of the loan term in order to fund the purchase of an asset or major expense. All of the types below are traditional installment loans — except credit builder loans.
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Auto loans. Fund the purchase of a car, truck, trailer, or other automobile. Auto loans are common, safe options.
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Mortgage loans. Fund the purchase of a house or other real estate. Mortgages are common, safe, and wealth-building loans.
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Personal loan. Fund the purchase of unspecified assets or major expenses such as home improvement. Personal loans are common and safe.
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Credit builder loans (→ jump down to credit builder products).
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Savings-secured loans (→ jump down to credit builder products).
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Auto title loan. A loan that uses a physical car as collateral for the loan principal. They are part of high-cost, short-term loans with predatory APR above 35.99%. Auto title loans are high risk options that borrower should only use in emergencies.
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Payday loan. Payday loans are high-cost, short-term loans used to finance living expenses between paychecks. Payday loans are high risk options that borrower should only use in emergency situations.
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Pawnshop loan. A high-cost, short-term loan provided against items of value that major financial institutions and title lenders don't accept, such as jewelry. Pawn loans are high risk options that borrowers should avoid unless absolutely necessary.
Title, payday, and pawnshop loans are all examples of potentially
predatory practices. Consumers in cash-strapped situations who struggle
to find low-interest options turn to them in a bind, which is reasonable
under legitimate circumstances.
However, these borrowers should be wary of a
present bias, which is the tendency to value lower rewards in the short-term over higher rewards in the long-term. For example, title loans provide cash quickly,
but they can result in future car repossession if unpaid.
#2 Revolving Lines of Credit
Revolving credit is a type of debt that does not have a fixed number of installment payments. The lender typically provides a maximum amount (called credit limit) from which the borrower can withdraw and into which s/he can pay down an outstanding balance.
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Credit card. A reusable sum of credit that can be drawn down (the "balance") and paid back at regular intervals, usually months. When paid on time, the balance incurs no interest.
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Secured credit card (→ jump down to credit builder products).
#3 Bank Accounts
Bank accounts are ledgers used to track the deposit and withdraw of money. Contrary to popular intuition, accounts are not physical locations storing cash. They simply record transactions on a continual basis, usually on computerized ledgers.
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Checking account. A secure account in which borrowers store money (called a "deposit") used for transactions related daily expenses and income. Checking accounts usually do not earn interest. Lenders use deposits for lending activities.
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Savings account. A secure account in which borrowers deposit funds not expected for use in daily deposits and withdraws with penalties for withdraw.
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Certificate of deposit (CD). An investment-grade, interest-earning account with more austere withdraw penalties but higher rates than savings accounts.
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Credit builder account. (→ jump down to credit builder products).
Savings accounts and Certificates of Deposit can double as collateral. For example, borrowers can use them to secure credit builder loans and thereby obtain flexible criteria and low interest.
#4 Payment Methods
Payment methods are tools consumers use to pay merchants for goods and services, usually without the use of physical bills and coins (i.e "cash").
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Prepaid card. Also known as a prepaid debit card, allows consumers to make payments directly withdrawn from a checking account instead of paying in cash.
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Payroll card. Payroll cards are prepaid cards on which salaries are deposited that employees can use for purchases. They are useful for consumers who do not have a bank account.
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Credit builder cards (→ jump down to credit builder products).
Credit Building Products from Each Category
Credit building products are a subset of consumer financial products whose purpose is to build consumer credit profiles. They have lower costs than traditional financial products and provide flexible eligibility criteria to consumers with limited, zero, or damaged credit history.
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Credit builder loans. A type of personal loan that helps consumers with little or no credit improve their score by applying a combination of flexible eligibility criteria and deferred principal distribution. Self is an example.
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Savings-secured loans (SSLs). A type of fully-secured credit builder loan that provides low-rate principal using savings held as collateral. Technically, SSLs' purpose is not to build credit, but they are ineffective as funding instruments because borrowers can use the savings pledged as collateral rather than pay interest, regardless of how small the interest rate is.
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Secured credit cards. A type of credit card that requires the borrower deposit as collateral a sum of money, which is usually but not always equal to the amount of the credit line. Secured credit cards can become a normal credit card in a process called graduation.
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Credit builder account. Distinct registries that record transactions from other credit builder products. It is the accounts, and not the products, that report to credit bureaus.
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Credit builder cards. Payment cards whose purpose is helping consumers with subprime credit improve their profile with the use of debit-to-credit transaction swapping, limited penalty fees, and flexible acceptance criteria. They do not require deposits like secured credit cards. While credit cards with certain conditions can be credit builder cards, not all credit builder cards are credit cards. Tomo is an example.
Combinations are Key
The average American consumer uses bank accounts, debit cards, and credit cards in his/her life because these products are commonplace.
A healthy financial makeup includes the use of various accounts from each category. A well-timed mortgage loan, for example, can lead to the purchase of an asset that appreciates.
Creditors, such as banks, trust borrowers who show responsible use of installment and revolving credit over time, so consumers should consider demonstrating reliability with low-cost debt.
Citations
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“Your Money, Your Goals Toolkit.” n.d. Consumer Financial Protection Bureau. https://thickcredit.com/studies-and-reports/cfpb-your-money-your-goals
