Question

Explain the regulation of consumers credit.

Answer 1

Regulation of consumer credit is a qualitative (selective) credit-control method used by the central bank to regulate instalment credit provided for purchasing expensive durable goods such as cars and computers. Under hire-purchase finance, consumers pay part of the price as a down payment and repay the remaining bank-financed amount in instalments. The central bank regulates this credit by influencing the interest rate, down-payment amount, number of instalments and maximum repayment period. To expand consumer credit, it may reduce the down payment, lower the interest rate and extend the repayment period; to contract it, it may raise the down payment and interest rate and shorten the repayment period.