What Is a Finance Company?

A finance company is a financial institution that lends money to people or businesses. Finance companies make a profit from the interest rates charged on their loans, which are usually higher than the rates banks charge for their loans. Financial institutions play a vital role in capitalist economies by matching individuals who need funds with those who have funds to lend. They operate in a number of sectors, including credit unions, banks, insurance companies and securities firms.

Some finance companies are regulated by federal or state authorities finance company near me and have to comply with strict rules and regulations. Other finance companies are not regulated and can be more speculative in their lending practices, which can expose them to greater risk. Finance companies fall into three main categories, according to economists: consumer finance companies, mortgage companies and commercial finance companies.

Consumer finance companies, also called direct-loan and payday loan companies, make small loans to clients who need cash immediately. These companies have been accused of taking advantage of people who are in dire need of funds. For example, Bob needs $200 to cover his monthly expenses, but he only has two weeks before his next paycheck arrives. He goes to a consumer finance company, which will lend him the money if he provides a personal check and proof of income. Bob agrees to provide the company with his pickup truck as collateral if he fails to repay the loan.

Mortgage companies specialize in providing loan options to people who want to purchase real estate. These companies borrow funds from banks and other financial institutions to fund the mortgages they offer to clients. They are not regulated in the same way as banks and have been the target of some controversy due to high interest rates they often charge.

Commercial finance companies make loans to small and large businesses. These companies also typically have a greater risk of bad debt than banks, so they charge higher interest rates on their loans than banks do on theirs.

In addition to offering financing, some finance companies provide other services related to their areas of expertise. For example, some of these companies offer payment agents through credit cards, wire transfers and currency exchange. Others, such as investment banks, act as middlemen in complex corporate transactions.

Some finance companies are part of larger entities, such as automobile manufacturers or retailing giants. In these cases, the large entity owns and operates the finance company as a subsidiary or captive. For example, most American automobile manufacturers have a finance company called the General Motors Acceptance Corporation or Daimler Chrysler Financial Services that provides loans to customers who purchase vehicles from those manufacturers. This practice is common in other parts of the world as well.