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Consumer Borrowing - Essay Example

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Consumer Borrowing

On the other hand, there are users whose spending needs exceed their current income levels so they have a deficit. Therefore, they require additional funds to make up the difference.
These funds can be trasferred from suppliers to demanders of money in two ways. First is through Financial institutions that are of two types including depository insitutions such as commercial banks, saving and credit unions (also known as financial intermediaries) and non-depository instituions such as life insurance companies, pension funds and finance companies. Depository institutions especially banks accept deposits from savers (lenders) of money that they can withdraw on demand. They pool customer deposits and use these funds to make loans or investments to demanders or borrowers of money (consumers and businesses). These institutions make money because of interests rate that they charge from demanders, which is higher than what they to pay to savers or depositors of money. On the other hand, non-depositry institutions such as insurance companies accept business risks of their customers in return for a series of payments called premiums. They then invest their excessive funds after meeting their operating expenses (insurance claims, salaries etc). Finance companies offer short-term loans to borrowers. They usually sell securities or borrow funds from commercial banks therefore they tend to charge higher interest rates as compared to banks.
Second is through financial markets where people and organizations wanting to borrow money are brought together with those having surplus funds. Financial markets are primarily divided into primary and secondary markets. Primary market are those in which corporations raise funds by issuing new securities. In Secondary markets, on the other hand, previously issued securities such as mortgages, bonds and stocks are traded among investors. Stock exchanges are perhaps the best example of these type of markets. ...Show more


These households, businesses, financial institutions and financial markets together form what is known as the Financial System. In simple words, we can define…
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Consumer Borrowing
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