(Guardia, 2000). Consumer credit does not need a guarantee and the tax provisions covering this type of lending differ from those pertinent to mortgage credit.
The circular flow diagram is very helpful in understanding Britain’s consumer debt. The circular flow diagram enables one to understand macroeconomics. Goods and services and resources flow through the economy in one direction. The money flows through the economy in the opposite direction. Money is exchanged for specific goods and services which the households purchase regularly.
Another important aspect of the circular flow is the presence of the three main factors of production in the economy fall under these categories: labor, land, and capital. Wages reflect the price of labor. Rent reflects the price of land. Profit is the price for capital. Businesses in the economy are expected to generate profits. Workers who work in these businesses are paid in wages. Then the persons who utilize land for their businesses pay a fixed rent.
The circular flow shows that the households (composed of family members), in the circular flow, own all the labor, land and capital. In markets for factors of production, households sell the services of labor, land and capital to firms in exchange for wages, rent and profit.
Then in the area of consumer credit, the households borrow from banks (which hold or maintain the savings from the firms households and offer a credit service to the firms and the households ) in order to purchase at a current time a product or service that they need now. For the credit service, the banks then charge interest rates on the households for those loans. Then after a designated period of repayment, the households pay the loans plus the interest charges from the wages they derive from the sale of their labor services to the firms and the profits they derived from their businesses in the economy.