Pakistan & Gulf Economist

Consumer Finance in Pakistan: Consumers Could Face Mounting Debt Pressures in 2023.

The Pakistan Government and International Monetary Fund could not reach a deal and a visiting IMF delegation departed Islamabad after 10 days of talks. Pakistan is in dire need of funds as we battle an injuring economic crisis, and a bailout from the IMF alone is unlikely to put the economy back on track.

Even though the economy is in a deep recession, inflation is extremely high, the highest since 1973. It could average 36% in the first half of 2023 due to higher energy and food prices and the weaker Rupee.

The consumer price index rose 27.5% year-on-year in January, its highest in nearly half a century.

Low income households could remain under extreme pressure as a result of high inflation on account of being disproportionately exposed to non-discretionary items. What our economy really needs is a continuous and strong economic management. We have an inevitably tough journey ahead, with fiscal and monetary severity to continue well into 2024.

The Basics, The Pros & Cons

The economy of Pakistan is classified as a low-income developing economy. It Is under severe stress with low foreign reserves, a depreciating currency, and high inflation is based on consumption, hence consumer finance is high in demand.

Consumer credit arose in order to cover the satisfaction of a consumption need of people who do not have the financial capacity to cover their cost in cash. This form of access to consumption is a loan granted to purchase a good or service for personal use in certain terms.

The function of consumer financing is to allow consumers to defer payment of purchases and pay with interest at a predetermined and sometimes variable interest rate. Many consumers use it to purchase durable consumer goods and services at higher prices, such as TVs, Air Conditioners, Cooking Ranges, Refrigerators, Personal Computers, Apparel, Furniture, Cars, Motorcycles, Home, Travel, among others.

As it is used to consume material goods, it is a loan in which the debtor receives a sum of money in his hands that he promises to repay to the institution or financial company that granted it, in an agreed term and with certain interest (which depend on the interest rate of the financing).

Generally, the payments are monthly and are paid in 24, 36, 48, 60, 72 or more months; according to the plan, the payment capacity, the amount and the institution.

It can be requested in a very easy way, in fact, the user can obtain it without having a credit history. This is why some people refer to it as “small payments”.

Consumer finance by nature is bank credit cards or department store or self-service cards, although the common types of consumer finance are varied, including motor vehicles, personal installment loans, and some retail installment or lease-to-own loans. With respect to home mortgages, they are typically not considered in this category due to the nature and specific regulation of the mortgage lending industry.

The Pros of Consumer Finance

(1) It allows consumers to use the products and services, while still paying for them without having to wait until they have saved enough money for a cash purchase.

(2) Credit and Debit cards allow consumers to shop online easily.

(3) Paying off financing successfully builds a favorable credit history, allowing consumers to take advantage of other financing opportunities.

(4) Access financing relatively easily and quickly, without having to present documents as collateral that you often don’t even have.

(5) The variety of things you can acquire with this type of financing is very wide, ranging from household items to personal items.

(6) The down payment and the installments that are given apparently are not very high.

The Cons of Consumer Finance

(1) The final price of the item obtained through financing goes up considerably.

(2) The interest rate can be high and is information that is not given to the client if the client does not ask for it.

(3) They also charge other fees and commissions, such as account management, annuity, insurance, etc.

(4) The payments last so long that in many cases the payment is not finished.

(5) Since the payments are not made, in many cases it is necessary to proceed with the seizure.

(6) One of the disadvantages of using this type of financing is that it reduces the ability to save money, which can leave families vulnerable if financial emergencies arise.

(7) A damaged credit rating on our credit bureau due to unpaid financing can negatively affect a consumer’s ability to obtain new personal or business financing.

Advices before Applying for Consumer Finance

Keep in mind the following recommendations to make good use of your financing:

(1) Save. If we promote it in the family and carry out this activity, surely, we will always have the necessary money to buy what we need or want, without having to get into debt.

(2) If you are determined to buy by this route, then analyze several options and your personal situation in order to decide the one that best suits you.

(3) Have a calculator at hand and add all the subscriptions to each option so that you really know how much the product you want to buy is going to come out.

(4) Don’t resort frequently to this type of purchases that offer you the possibility of weekly or monthly payments.

(5) Before purchasing financing, consider your solvency and ability to pay.

(6) Don’t get ahead of yourself, check before you buy the product if you can buy it without the need for financing.

(7) Remember not to confuse the overpricing of a product with the interest rate, this is separate.

(8) Don’t forget to ask if your weekly or monthly payments include administration expenses, insurance and other charges made by some stores.

(9) It is also important to pay punctually to avoid the collection of surcharges or embargoes on the acquired property.

(10) Don’t forget to analyze your ability to pay, on that basis you will determine the amount of financing that suits you.

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