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CONSUMER PURCHASING AND
CONSUMER CREDITS

4/25/2024
 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 4/25/2024
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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
CONSUMER PURCHASING
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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 information is

collected, a consumer will be able to evaluate
the different alternatives and choose the most
suitable to his needs.
 Evaluation bases on two aspects
 Objective characteristics such as the features
and functionality of the product and
 Subjective characteristics (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. A person
have to consider both ownership and operating
costs.
E.g 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

4/25/2024
 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 36
months (3years)

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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. 4/25/2024
 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

4/25/2024
 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 4/25/2024
 Rules to 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. 4/25/2024
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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 due(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

4/25/2024
 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

4/25/2024