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CONSUMER PURCHASING AND

CONSUMER CREDITS

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 CONSUMER PURCHASING
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 Consumer purchasing is the process by which

individuals search for, select, purchase, use, and
dispose off goods and services, in satisfaction of their
needs and wants
 Buying decisions involves a trade-off between current
spending and saving for the future.
Basis for Buying Behavior
 Economic, social and personal factors (values) affects
daily buying behavior and therefore they are the
basis for spending, saving, investing, and achieving
personal financial goals

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 PRACTICAL PURCHASING STRATEGIES
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Individuals implement Purchasing strategies in order

to make cost effective purchasing decisions from
a group of efficient vendors who will deliver
quality goods on time and at mutually agreeable
terms.
Strategies
1. Timing Purchases e.g. buying winter clothes at
summer when prices are probably low
2. Store Selection. For an effective purchasing, Issues
like location, price, product and services available
have to be taken into account.
3. Brand comparison
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4. Label information. E.g. information about operating

costs for appliances assists in selecting the most
energy-efficient models. Likewise open dating such
as ‘use before July 30’ describes the freshness/shelf
life of perishable products
5. Price comparison. Compare the unit price of
packages of different sizes of the same brand or
different brands. Large packages are usually the
best, however compare using unit pricing

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 STEPS IN EFFECTIVE MAJOR
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CONSUMER PURCHASING
Major purchasing is an arrangement or plan for buying
items that are bought once over a long period and of
higher value. Steps in major purchasing involves the
following activities
1. Pre shopping activities.
 This involves defining your needs and obtaining
relevant information.
 Pre shopping activities include both problem
identification and information gathering.
 Problem identification. What is your real need? An
individual may think the problem is having a car while a
real problem is having a transportation

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 Having a narrow view of the problem may lead to

buying a certain brand when another brand at a
lower price serves the same purpose or when
another brand at the same price provides better
quality.
 Information gathering. Information is power and this
brings in better decisions. Sources of information
include personal contacts, business organizations,
media information, government agencies, online
sources etc

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 2. Evaluating Alternatives: Once the information

collected, the consumer will be able to evaluate the
different alternatives that offer to him, evaluate the
most suitable to his needs and choose the one he think
it’s best for him.
 In order to do so, he will evaluate their attributes on
two aspects. The objective characteristics (such as
the features and functionality of the product) but
also subjective (perception and perceived value of
the brand by the consumer or its reputation)

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3. Determining Purchase Price e.g. price

negotiations/bargaining.
4. Post purchase Activities/Behavior. Consider both
ownership and operating costs. For example for the
car purchase decision, issues such as depreciation,
insurance, license, registration, maintenance, oil,
tires, parking etc have to be taken in to account.

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 CONSUMER CREDIT
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 Credit is an arrangement to receive cash, goods, or

services now and pay for them in the future.
 Consumer credit refers to the use of credit for
personal needs except a home mortgage i.e.
borrowing for housing has investment aspects that
result in a separate classification
 Consumer credits is based on trust in peoples
ability and willingness to pay bills when due

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 Types of Consumer Credit
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 Basically three types exist; Installment credit,

noninstallment credit and open end credit
Installment loan
 Is a loan that the borrower pays back in a specified

period of time and in payments of equal amounts,

usually monthly. For example a Tsh 18m automobile
loan requires monthly payment of Tsh 500,000 per
month for 48 months (4years)

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Noninstallment loans
 These are single payment loans where by a borrower
pays both principal and interest as lump sum in one
time. For example a loan of Tsh 10m at 20% interest
with a single payment of Tsh 12m due at the end of
one year.
Open-end credit
 In open end credit, credit is extended (up to a certain
credit limit) in advance of any transaction, so that the
borrower does not need to re apply each time credit is
desired.
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 In other words, open end credit is a line of credit (no need

of re-applying) in which loans are made on a continuous
basis and the borrower is billed periodically for at least
partial payment
 It includes revolving charge accounts such as bank credit
cards and departmental stores accounts and any other
charge accounts
 Therefore, Using a credit card issued by departmental
stores or banks to make purchases at different stores,
charging a meal at restaurant, fuel at petrol stations and
using overdraft protection represents an open end credit
 Some lenders allow 20 t0 25 days to pay a bill in full
before incurring any interest charges

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 SOURCES OF CONSUMER CREDIT
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1. Commercial banks
Types of loans offered
 Single payment loan

 Personal installment loan

 Credit card loans

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Lending policies
 Commercial banks seek customers with long

established credit history

 Often require collateral or security

 Determine repayment schedule according to the

purpose of the loan
 Vary credit rating according to type of credit, time

period, customer credit history etc

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2. Finance companies.
Types of loans offered
Personal installment loans
Lending policies
 Often lend to customers without well established
credit history
 Often make unsecured loans

 Make a higher percentage of small loans than other

lenders
 Maximum loan size limited by law

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3. Credit Unions
Types of loans
Personal installment loans
Lending Policies
 Lend to members only

 Make unsecured loans

 May require payroll deductions to pay off loan

 Application needs approval of members of committee

 Offer a variety of repayment schedule

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4. Life insurance companies

Type of loan
Single repayment or partial payment loans
Lending Policies
 Lend on cash value of life policy

 No date or penalty on repayment

 Deduct amount owed from the value of policy benefit

if death or other maturity occurs before repayment

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5. Savings banks and loan associations e.g. community

banks
Types of loans
 Personal installment loans

 Home improvement loans

 Education loans

 Savings account loans

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Lending policies
 Lend to all creditworthy individuals

 Often require collateral

 Loan rates vary depending on size of loan, length

of payment and security involved.

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 Advantages of Credit
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 Consumer credit enables people to enjoy goods and

services now and pay for them in the future based on
payment plan
 Credit cards permit the purchase of goods even when
funds are low
 Credit cards provide shopping convenience and
efficiency of paying
 Credit is a substitute for cash
 Credit purchase is safe, no need to carry huge
amount of cash when travelling or shopping

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 Disadvantages of Credit
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 Temptation to overspend
 Failure to repay the loan may result into loss of income,
valuable property, reputation, serious long term financial
problems, damage to family relationships and slowing
progress towards financial goals
 It does not increase total purchasing power i.e. credit ties up
the use of future income since credit purchase must be paid
using future income.
 Interest is costly. Interest represents the price of money. Credit
costs money i.e. monthly finance charges and compounding
effect of interest on interest.

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 Additional fees are common; a significant negative

aspect of credit is large number of fees assessed
by creditors. For example; charging
 transaction fee each time the card is used,
 late payment fees when the borrower fails to make
payments on due date
 Over the limit fee when the card holder exceeds his
or her credit limit.

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 High priced add-ons may be difficult to avoid

 Many lenders encourage borrowers to sign up for
credit life insurance that pays the unpaid balance of
a loan to the lender in the event of borrowers death.
People are usually overcharged for this insurance
while few need it
 Credit disability insurance may also be offered by
lenders which repays outstanding loan balance if the
borrower becomes disabled, but usually the term
disability being narrowly defined.

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 Credit card versus debit card
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 Credit card extends credit and delays your

payment
 Debit card electronically subtracts money from your
savings or checking account to pay for goods and
services. Mostly used at ATMs

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 Credit Capacity
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 Refers to the ability of the borrower to repay the

loan and meet his/her other expenses comfortably
 Before you take out a loan ask yourself whether you
can meet all of your essential expenses and still
afford the monthly loan payments
How?
 Add up all your basic monthly expenses and subtract
it from your take home pay, if the difference does not
cover the monthly loan payment and leave funds for
other expenses, you are incapable of that loan

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 Rules of credit Capacity
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Rule #1. Debt Payment to Income Ratio

 Debt payment to income ratio = monthly debt
payment(excluding mortgage pay)/ net monthly
income
 It is suggested by experts that an individual should
not spend more than 20% on credit payments. Since It
is unsafe towards meeting his/her financial goals.
Thus if debt payment to income ratio exceeds 20%, it
is unsafe to take the particular loan.
 NB: Mortgage pay is excluded because it is long term
liability and has an investment attribute.

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Rule #2. Debt to equity ratio

 Calculated by dividing total liability by net worth.
Excluding value of home(in assets) and amount of
mortgage payment(in long term liabilities)
 If the ratio is about 1, your consumer installment debt
roughly equals your net worth, meaning you have
probably reached the upper limit of your debt
obligations
 i.e. less than 1- safe, greater than 1- unsafe

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 Credit Evaluation
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 Credit evaluation is the analysis of the authenticity for

an applicant to receive a loan from the financial
institution.
 Once a person think of applying for a loan, he/she
must understand the factors that a lender consider
whether to extend loan or not
 Most lenders build their lending decision based on
some attributes of the borrower, these are referred
as ‘Five Cs of Credit’ i.e. character, capacity, capital,
collateral and conditions

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Character
 borrower’s attitude toward his/her credit
obligations
 Borrower’s trustworthy and stability

Capacity
 Borrower’s financial ability to meet credit
obligations
 Capacity is affected by the income and debts an
individual already has

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Capital
 Borrower’ assets or net worth

 Including cash, property, personal possessions, and

investments
Collateral
 A valuable asset that is pledged to ensure loan
payments
 Creditors look at what kinds of property or savings
an individual already have

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Conditions
 The general economic conditions that can affect a

borrower’s ability to repay

 General conditions such as unemployment and

recession

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