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Consumer Credit

( Originally Published 1939 )



A large and growing part of the credit used in distribution goes to finance sales to the ultimate consumer. In the broadest sense consumer credit may be considered as including all credit extended to individuals, as contrasted with business firms and institutions. In its more usual sense the term includes loans made or credit given to individual consumers to finance purchases of consumable goods and services. This would exclude consumer borrowing for purposes of investment in securities or real estate or for home construction.

A recent estimate by F. R. Hoisington, jr. on whose material this section is based, shows that the total amount of credit advanced to consumers for all purposes and outstanding at the end of 1937 was $11.1 billion, as shown in Table 35. The principal agencies ex-tending credit to consumers were: (1) retail stores doing an ordinary credit business, accounting for about $1.5 billion of the total outstandings, (2) instalment credit agencies, which account for about $3.1 billion, (3) commercial banks and several varieties of personal loan agencies, such as personal finance companies, industrial banks, pawn shops, credit unions, remedial loan associations, philanthropic loan funds, illegal lenders, etc., with aggregate loans of approximately $1.9 billion, and (4) agencies making loans based on savings, such as life insurance companies and building and loan associations, with total outstandings of about $3.6 billion. In addition, advances by relatives and friends were estimated at about $1 billion.

Credit for Consumption Purposes

How much of this grand total of $11.1 billion is really consumer credit used for consumption purposes can only be guessed at. The $4.6 billion of retail charge accounts and instalment credit out-standing was obviously all used for that purpose. Results of a few scattered and limited studies also indicate that a large proportion of personal loans are actually made to finance the purchase of consumption goods and services. An analysis made by the Household Finance Corporation and the Beneficial Industrial Loan Corporation (in 19341937) and the American Investment Company of Illinois (in 19341935) of the purposes for which small loans were made showed that 50 per cent were probably for consumers' goods and most of the remainder for consumers' services. If only 75 per cent of the $1.9 billion of loans made by commercial banks and personal loan agencies were for consumption purposes the estimated volume of consumer credit would be increased by more than $1.4 billion, bringing the total to about $6 billion.

Building and loan association share loans and life insurance policy loans differ both in nature and purpose from other types of credit extended to consumers. Since they are based on paid-in values they are not loans in the true sense of the word for the borrower is really borrowing his own money, albeit he has to pay interest on it. Loans on building and loan shares are made largely for purchase of real estate, and the proceeds of life insurance loans are used for many purposes besides the purchase of consumers' goods-to buy securities or meet margin calls, to make a down payment on a house, and often to keep the policy in force when the policyholder is unable to meet premium payments.

It is impossible to estimate how much of the money borrowed on insurance policies is consumer credit, but it is probably a substantial share of the $3.4 billion outstanding on life insurance policy loans. A large part of the $1 billion loaned by relatives and friends goes also to meet consumption needs. On the whole, the total volume of consumer credit may be conservatively estimated as in excess of $7 billion and possibly as large as $9 billion.

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