How Do Finance Companies Make Money
Ever wondered how financial service providers get so rich?
12:38 12 January 2021
Today we will provide answers to all of your questions. Everyone in today's society has most probably financed something. Some finance their necessities through banks, and others go for financial companies. Finance companies make money through multiple channels.
The idea of financing is not new to this world. It goes back to ancient Chinese regimes. Finance companies evolved with time as everything else. Finance companies' functions modernized, and the competition among the financial service providers grew. The rise in the competition became beneficial for the end-user. A modern finance company is a result of continuous evolution, and it is still evolving. To know more about finance companies read this article till the end.
Let us briefly tell you about the history of modern finance companies. It will help you in understanding the working and income of the finance companies.
History Of Modern Finance Companies
The actual history of finance companies goes back to ancient civilizations. People have been lending money to those in need for a long time now. The borrowers then returned that money with interest. Many individuals and companies have been seen doing this as a proper business in history. The idea of debt was born along with the invention of trade.
The traces of the early modern finance companies go back to London of the 1860s. It was the time when London was the center of trade. People from every part of the world went to London to do business. That is when modern finance companies were first seen in an organized way.
General Motors is among the pioneers of financing in the US. General Motor Acceptance Corporation(GMAC) is a captive finance company introduced by General Motors in 1919. Soon branches of GMAC were established in different states and even in Toronto. It was a massive success in the US and soon made it to Great Britain. In 1985 this captive finance company by General Motors earned $1 billion in revenue.
In the beginning, the company provided loans to their customers to increase the sales of their cars. Currently, GMAC provides loans for cars, personal usage, homes, and for starting a business.
How Do Finance Companies Work
Seemingly finance companies perform a lot of operations. At the base level, the finance companies do nothing other than lending money. Finance companies lend money to the people who are in need. You will be wondering that is what happens at the bank, so what's the difference? The difference is that the bank demands a good credit history before financing. In contrast, finance company's customers are mostly those people who have damaged credit history.
The finance companies usually have slightly lenient terms and conditions than the banks. All of these privileges come at a cost. Finance companies offer loans at a higher interest rate as compared to the banks. In many cases, the finance companies take loans from the banks. Later on, the money is provided at a higher interest rate to the customer. Does this make finance companies bad? No, because of the risk they handle.
Most of the customers of Finance companies have Bad credit. The bank denies granting them loans to such people, but finance companies take this risk. Although they pay slightly high, they get facilitated despite the damaged credit history.
Methods Of Earning
The primary source of earning for the finance companies is lending money. The finance companies grant loans to people in need and charge its fee in the name of the interest rate. The loans are further categorized depending upon the requirements of the customers.
Unsecured loans are offered to those people who need immediate financial assistance. These loans are also referred to as personal loans. People apply for such loans when they have to meet their financial requirements.
Commonly, people apply for personal loans for their weddings, renovate houses, and pay their medical bills. Some people who usually finance their expenses even borrow money for vacations. This allows people to meet their financial requirements with ease. Convenient installments are made, and life goes on smoothly.
Secured Loans are the type of loan in which some asset of the borrower serves as collateral. Collateral is an asset that becomes the finance company's property if the borrower fails to pay the loan.
The banks and the finance companies prefer secured loans. The reason is simple, the risk in secured loans is much less than the unsecured loans. If the borrower fails to pay the loan for some reason, the finance company gets possession of their asset. In most cases, the asset that serves as the collateral is worth more than the loan. The finance company or the bank auctions such assets and recovers their investment.
Vehicle financing is an excellent example of secured loans where the vehicle serves as the collateral.
Loans Offered To Businesses
Whenever a business requires financial assistance, they reach out to finance companies. For example, if a business is expanding or maintenance is needed, and the budget is short, they can apply for business loans. This helps them in taking care of their immediate needs without getting unstable.
There is also another way by which a business can get assistance to meet their financial needs. They can sell their balance due to the finance company at a discounted rate. For example, if a company has accounts receivables worth $100K, they can sell them for $90K. In this way, they can get instant money to remain stable.
Apart From Loans
There are some other ways apart from the loans that generate revenue for the finance companies. For instance, consider processing fees or application charges. The finance companies charge processing fees from the customer to start working on their application. There could be some terms and conditions according to which you will have to pay for certain processes.
ATM charges are also an example of such earnings. Whenever you make a transaction through an ATM that is not of your bank, you pay service charges. Just like these, there are several channels through which finance companies generate revenue.