July 24, 2024


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The basics of finance companies

The basics of finance companies

Finance companies mode of operation differs with that of mortgage lenders and traditional banks. Typically, finance companies offer loans from an existing capital source and get their profits from the interest that borrowers pay. Finance company requires that the borrower offers some collateral for the loan amount. They also rarely offer revolving credit lines. Borrowing more cash entails refinancing one’s loan and perhaps providing more collateral. Finance companies get their money by borrowing from commercial banks and the Federal Reserve System at interest rates that are relatively low and then lends the money at greater interest rates. This explains why their interest rates are higher than those charged by banks. Typically, finance companies provide both secured and unsecured loans to companies and individuals. However, it is important that when going for loans from finance companies, a person or a business has to be careful and only pick reputable companies. Review sites such as UK collected reviews usually have finance companies reviewed. The reviews can help you settle on the reliable finance company to go for.

Secured loans
In secured loans, the borrower has to provide finance companies with collateral. By definition, collateral refers to an asset offered to the borrower to secure a loan. If the borrower doesn’t repay the loan for any reason, the collateral becomes the lender’s property. Auto loans are examples of secured loans as the car serves as the loan’s collateral. The lender will take ownership of the vehicle if the borrower fails to repay the money. Likewise, when borrowers fail to pay the money as per the settled terms, the finance company can take the security and auction it in an open market. While offering secured loans, finance companies typically consider the credit history of the borrower. When  borrowers have a poor credit history, typically finance companies offer a higher annual percentage rate (APR) or interest rate.

Unsecured loans
Financial companies also offer personal loans. A personal loan is defined as a loan meant to meet the immediate financial needs of a borrower. Typically borrowers go for personal loans to meet expenses such as weddings, house innovation, vacation, or medical emergencies. Though most personal loans are secured, a financial company can provide a personal loan without any collateral, and in this case, these are unsecured loans. People tend to go to banks when in need of personal loans; however, banks offer personal loans only to persons who meet the loan eligibility criteria and those with a good credit history. Finance companies offer loans even to persons with a poor credit history and only charge them higher interest.

Lend to purchase products
Some finance companies are sales-based and offer loans to clients of certain retailers. For instance, a sales-based finance company can offer a borrower a loan to purchase a cooker from a home appliance company. In such cases just as is the case with banks, the finance companies offer equitable monthly instalments plans and client should select an appropriate equitable monthly instalment plan based on their monthly salary 

Provide business loans
Finance companies also offer businesses with loans. For instance, a company can approach a finance company to purchase or lease office equipment such as machinery or computer. Finance companies also offer companies with factoring services. Factoring refers to the scenario where a business needs immediate cash and meets these cash needs by conducting a financial transaction in which it sells its account receivable at a discount to a third party.

Finance companies are mainly categorized into three main categories: sales finance companies, consumer finance companies and commercial finance companies.

Commercial finance companies refer to finance companies that offer loans to small and big companies, mostly to help them cover new equipment costs. Sales finance companies, also referred to as acceptance companies, work by giving businesses loans to meet their short-term costs. They offer businesses with a service identical to the service that direct-loan companies offer to individuals.  Most of the companies that borrow money or conduct transactions with sales finance companies are large corporations. Consumer finance companies, on the other hand, offer small loans to individuals.

In conclusion, as seen in the article, finance companies strive to finance individuals and business activities. This means that finance companies are in charge of lending cash to individuals and businesses interested in the funding. Finance companies only focus on lending, and they do not receive deposits as banks do. With this article, one is equipped with the basics of finance companies and what they offer.