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There are several credit products which are being sold to the modern consumer. There are mortgages, car loans, education loans, and even credit card loans which have been aggressively sold over the years. The markets for most of these loans have now become saturated. This is the reason the banks and other financial institutions have come up with a new type of loan called point of sale financing in order to keep the industry growing.
In the recent past, the concept of point of sale loans has seen rapid growth. The attractive returns that incumbents have earned has attracted the attention of companies like MasterCard as well. Hence, the point of sales loan market seems all poised to grow.
In this article, we will have a closer look at what point of sale financing is, how it works and what are the benefits that it provides to all the parties involved.
Point of sale financing is a type of personal loan. It is usually obtained to pay for purchases such as furniture, electronics, cell phones, etc.
Under this arrangement, the lender provides finance only to consumers when they buy a single product. This is opposed to having a credit card which can be used to obtain finance regardless of the product which is being purchased. Also, point of sale financing as opposed to a personal loan. This is because the lender knows the exact purpose of the loan. Also, because no application has to be made to a lender in order to avail a point of sale loan. It is provided almost instantaneously.
More details about the point of sale loans have been listed below.
Point of sale loans are becoming popular because of a peculiar kind of relationship that modern consumers have with credit. On the one hand, millennials are averse to having a credit card or a loan. This is because they have seen their parents struggle under the negative financial effects of these loans during the 2008 financial meltdown.
On the other hand, these consumers want to splurge on certain occasions of their life. Millennials are averse to credit in general but wouldn’t mind taking a loan when it comes to special occasions like marriage, college or a first home.
This creates a peculiar situation where want credit only for a particular transaction but do not want to go through the hassle of applying for a personal loan. This unusual consumer behaviour is the real reason behind the existence of and rapid growth in consumer loans.
In order to encourage consumers to take out point of sale financing, lenders offer promotional schemes with artificially low-interest rates. Many lenders are known for providing 0% interest rate schemes as well. However, the reality is that lenders do make money on these loans. Instead of charging interests from the consumers, the lenders charge merchants a fixed fee for every loan that they originate.
For instance, this fixed fee is 7% of the purchase. Hence, if the value of the purchase is $1000, then the lenders will charge $70 as fees from the merchants the moment they originate a loan. The merchants are obviously not going to pay these $70 out of their pocket. They increase the price of the product in order to pay the lenders.
However, lenders do not want consumers to be aware that they are actually paying a hidden interest charge. This is the reason why they prohibit merchants from selling at any other price apart from the list price. Point of sale financing is offered both online as well as offline.
Many retailers have been encouraged to start using point of sale financing because of the benefits that it provides. Some of the benefits have been listed down.
For instance, many students have been using point of sale financing to buy high-end phones and gadgets. They could not afford to make a lump sum payment. However, many of them can pay monthly instalments. These students would not be eligible for credit via traditional means of financing. However, they can obtain finance via point of sale financing.
Consumers also benefit a great deal from this arrangement.
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Challenges to the Retail Sector (As per Michael Porter s Five Forces Model)
February 12, 2025
