A consumer finance company is not one that accepts deposits from its customers. It does not also serve as a saving and investment platform for its customers. It differs from banks and other companies that provide financial services.
The question is, what is a consumer finance company?
Having looked at what the consumer finance company is not, the question, what is a consumer finance company arises. A consumer finance company is a company that only deals with giving out loans to its customers. They make profits from the interest that accrues on the loan when their customers repay these loans. Continue reading to know more about consumer finance companies.
What Do Consumer Finance Companies Do?
A consumer finance company focuses on giving out personal and business loans. These companies understand the difficulty that individuals that do not have a credit rating or have collaterals often experience. They find it difficult to access loans from the banks and elsewhere. Thus, these companies tap into the risky venture of providing access to loans to these classes of persons. However, because of the high risk involved, they tend to charge higher interest rates to make up for this.
They offer a shorter period for processing your loan application. Most times, you receive the loan on the same date you applied for it. That is not all; the repayment plan runs in a manner that suits the income of the customer. Thus, the repayment plan is flexible and adjustable.
What A Consumer Finance Company Is Not
A consumer finance company is not a bank. Another name for it is a non-bank lender. Since it is not a bank, it does not accept deposits from its customers. They only give out loans that the borrower must repay before he can qualify for subsequent loans.
Unlike the bank, their customers do not receive a fixed date for the payment of their loan. The reality is that if you default on your credit, you will still make the payment. However, the late payment attracts a higher interest rate than if you had paid on time. It is when you refuse to pay for an extended period after when the repayment is due that the company reports you to the credit bureau.
Operations Of A Consumer Finance Company
A consumer finance company provides funds to its customers. They do this by using the capital of the company to fund these loans. They generate their profit from the interest they charge on loans. Their profits tend to increase when customers fail to repay the loan they took at the due date. When this happens, the company charge their customers higher interest rate for the failure to pay at the right time.
Most times, these consumer finance companies provide the services that they offer by collaborating with another finance company. They could partner with a credit company or finance company and resell their loans to its customers. In this manner, the loans they give out are loans that they back-up with securities.
The primary operation of a consumer finance company is that it concentrates on consumer lending. Some focus on lending to consumers, while others focus on granting loans to businesses. Some focus on giving loans to fund the purchase of products made by specific manufacturers.
How Are Consumer Finance Companies Funded?
Consumer finance companies usually generate their funds from banks and also from the public. At other times, they also engage in other services to generate revenue from it. These services include providing insurance coverage to businesses while also lending to these businesses at the same time. They tend to earn higher on these earning assets that they give out to business than they make on personal loans.
Do Consumer Finance Companies Pay Tax?
Like all companies, consumer finance companies are also liable for the payment of taxes. They pay taxes to both the federal government and even to the state governments where they operate. The charge that they pay to the federal government is the usual income tax that accrues to the federal government.
How Is The Consumer Finance Company Different From A Bank?
A consumer finance company is different from the bank in several ways. The first of such difference is that the bank accepts deposits from its customers, unlike the consumer finance companies that do not take deposits. Banks allow their customers to create accounts where they save their money and can only withdraw them when the need arises.
Consumer finance companies usually charge interest rates that are higher than the ones banks charge. The reason for this higher interest is due to how risky the business of consumer lending can be. These consumer finance companies have more cases of default in loan repayment than banks do.
Consumer finance companies do not come under strict regulatory frameworks like the banks. It is understandable why more stringent regulations apply to banks, mainly since they accept deposits from their customers.
The Regulatory Framework For Consumer Finance Companies
The various state governments of the states hosting these companies have the responsibility for regulating the company. Where the company is vast, it may need to obtain a license from several states.
Consumer finance companies are different from credit card companies. Unlike consumer finance companies, the federal government of the United States regulates the activities and operations of these credit card companies.
The requirement for consumer finance companies to obtain a license in various states is a result of the varying conditions in the various states. Due to this difference in state laws and regulations, different terms may be available to the consumers in different areas, especially with regards to interest rate and repayment.
Is A Credit Card Company A Consumer Finance Company?
Although a consumer finance company might often issue a credit card to its customers to access their services, one should not mistake it for a credit card company. The mistake with thinking that they are credit card companies comes from the fact that most of the time, they advertise their services like credit card services.
The Consumer Finance Industry
The consumer finance industry is rapidly growing because the banks and major players in the financial sector are reluctant to grant loans to persons with little or no credit rating. These companies are treading where the key players are afraid of treading because of the inherent risk involved.
However, with the growing rate of personal loans that customers are taking from these consumer finance companies, banks are beginning to see the vast potentials and are beginning to tap into it. Hence, there is a growing competition in the personal loan industry. Banks are entering the industry rapidly and creating severe competition for consumer finance companies.
Notwithstanding the growing competitiveness in the personal and business loan industry, persons and businesses still prefer to take loans from the consumer finance companies that are not so concerned with the customer’s credit rating and history.
Other Finance Companies That Are Similar To Consumer Finance Companies
There are finance companies whose operations are identical to the consumer finance companies and are such that you can easily classify them as consumer finance companies.
A sales finance company is one of such companies that are similar to the consumer finance company. These companies also give out loans to businesses to help them sort out the cost of running their business. Like consumer finance companies, they do not need these businesses to secure the loans they take with collateral.
Sales finance companies usually get involved in dictating how the business will use the funds they give out. The business that receives these loans from sales finance companies cannot, on its own, determine how to use the fund that it is receiving.
Another company that is similar to the consumer finance company in its operations is the commercial finance company. The commercial credit company is another name for the commercial finance company. These companies give loans to both small and big businesses to fund the purchase of new equipment.
One aspect of these commercial finance companies is that small companies tend to pay interest rates that are higher than the more prominent companies. The rationale for this is that there is a higher risk in lending to smaller companies. It is not the case when one is lending to bigger companies. As a result, commercial finance companies try to cushion this risk of losing money by imposing higher interest rates for smaller companies.
In comparing the interest rate payable by the smaller companies and the one payable by the bigger companies, the difference might appear to be insignificant. However, when the company accumulates the extra interest from these smaller companies, it generates a lot of extra money that serves the purpose it tends
Conclusion
The question, what is a consumer finance company, is one that this article readily answers. It is essential to note the key features of a consumer finance company that differentiates it from other companies, which provides financial services to its customers. It is the failure to understand these distinguishing factors that make one easily mistake the consumer finance companies for what it is not.
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