Today’s consumers have many sources of consumer loans from which to choose. Most consumer lending occurs through depository institutions and sales finance companies. Other sources include consumer finance companies, stockbrokers, and insurance companies. Table 6.3 shows the interest rates charged and example payment amounts and finance charges from these various sources of consumer loans.
Depository Institutions Loan Money to Their Banking Customers
Depository institutions include commercial banks, mutual savings banks, savings banks, and credit unions . They tend to make loans to their own customers and to noncustomers with good credit histories. For most loans, depository institutions offer highly competitive rates, partly because the funds loaned are obtained primarily from their depositors. The interest rate commonly ranges from 9 to 16 percent. Research indicates that many people who go elsewhere for loans actually meet the qualifications for depository institution lending and end up paying a higher interest rate than necessary
Sales Finance Companies Loan Money to Buy Consumer Products
A sales finance company is a seller-related lender (such as GMAC Financial Services for General Motors Corporation and Ford Motor Credit) whose primary business is financing the sales of its parent company. Such firms specialize in making purchase loans, often with the item being bought serving as the collateral for the loan. Because the seller often works in close association with the sales finance company, credit can be approved on the spot. Sales finance companies require collateral and deal only with customers who are considered medium to good risks. Thus, their interest rates are often competitive with
Depository Institutions Loan Money to Their Banking Customers
Depository institutions include commercial banks, mutual savings banks, savings banks, and credit unions . They tend to make loans to their own customers and to noncustomers with good credit histories. For most loans, depository institutions offer highly competitive rates, partly because the funds loaned are obtained primarily from their depositors. The interest rate commonly ranges from 9 to 16 percent. Research indicates that many people who go elsewhere for loans actually meet the qualifications for depository institution lending and end up paying a higher interest rate than necessary
Sales Finance Companies Loan Money to Buy Consumer Products
A sales finance company is a seller-related lender (such as GMAC Financial Services for General Motors Corporation and Ford Motor Credit) whose primary business is financing the sales of its parent company. Such firms specialize in making purchase loans, often with the item being bought serving as the collateral for the loan. Because the seller often works in close association with the sales finance company, credit can be approved on the spot. Sales finance companies require collateral and deal only with customers who are considered medium to good risks. Thus, their interest rates are often competitive with
those offered by depository institutions. Their interest rates may be even lower than those offered by other sources if the seller subsidizes the rate to encourage sales as with the special low-APR financing often offered on new cars, for example. Most newcar loans today are made by sales finance companies.
Consumer Finance Companies Make Small Cash Loans
A consumer finance company specializes in making relatively small loans and is, therefore, also known as a small-loan company. These lenders range from the wellrecognized Household Finance Corporation (HFC) and Beneficial Finance Corporation (BFC) to many local neighborhood lenders. Such companies make both secured and unsecured loans and require repayment on a monthly installment basis. The interest rates they charge are higher than those available from depository lenders because consumer finance companies focus on borrowers with low credit scores. Approximately one-fifth of all loans granted by consumer finance companies are for the purpose of debt consolidation (described later). Other common uses of such loans are for travel, vacations, education, automobiles, and home furnishings. Some small-loan companies specialize in making loans by mail. They advertise in newspapers and magazines and on the Internet to attract borrowers, who complete a credit application and receive approval via mail
Stockbrokers Loan Money to Their Clients
Many people build significant assets in investment accounts that may be earmarked for their children’s college education, their own retirement, or other specific needs. If you have a margin account , you can borrow from your stockbroker using your investments as collateral. Although many people prefer not to tap into these funds directly, it may be possible to borrow from or against these accounts. For example, it may be possible to borrow from certain employer-sponsored, tax-sheltered retirement accounts , depending on the rules of the plan. Care must be taken to ensure that the loan plus interest is repaid so that the savings goal can still be met. Tax consequences may arise if retirement account loans are not repaid.
Insurance Companies Loan Money to Their Policyholders
Insurance companies, such as State Farm or Allstate, offer car loans and credit cards to their policyholders. They may make these loans out of their own funds or have bank subsidiary companies set up to handle such loans. Insurance companies loan only to their customers with high credit scores. As a consequence, they can be a low-cost source from which to borrow money. Policyholders who have cash-value life insurance policies can obtain loans based on the cash values built up in their policies. An advantage to borrowing on a cash-value life insurance policy is that the interest rates are low, ranging from 4 to 6 percent even though the policyholders actually borrow their own money. Many people fail to pay back such loans because no fixed schedule of repayment is established and insurance companies do not pressure borrowers to repay the debt. If the insured person dies before repaying the loan, the life insurance company will deduct the amount of the loan from the amount that would otherwise be paid on the policy.
Consumer Finance Companies Make Small Cash Loans
A consumer finance company specializes in making relatively small loans and is, therefore, also known as a small-loan company. These lenders range from the wellrecognized Household Finance Corporation (HFC) and Beneficial Finance Corporation (BFC) to many local neighborhood lenders. Such companies make both secured and unsecured loans and require repayment on a monthly installment basis. The interest rates they charge are higher than those available from depository lenders because consumer finance companies focus on borrowers with low credit scores. Approximately one-fifth of all loans granted by consumer finance companies are for the purpose of debt consolidation (described later). Other common uses of such loans are for travel, vacations, education, automobiles, and home furnishings. Some small-loan companies specialize in making loans by mail. They advertise in newspapers and magazines and on the Internet to attract borrowers, who complete a credit application and receive approval via mail
Stockbrokers Loan Money to Their Clients
Many people build significant assets in investment accounts that may be earmarked for their children’s college education, their own retirement, or other specific needs. If you have a margin account , you can borrow from your stockbroker using your investments as collateral. Although many people prefer not to tap into these funds directly, it may be possible to borrow from or against these accounts. For example, it may be possible to borrow from certain employer-sponsored, tax-sheltered retirement accounts , depending on the rules of the plan. Care must be taken to ensure that the loan plus interest is repaid so that the savings goal can still be met. Tax consequences may arise if retirement account loans are not repaid.
Insurance Companies Loan Money to Their Policyholders
Insurance companies, such as State Farm or Allstate, offer car loans and credit cards to their policyholders. They may make these loans out of their own funds or have bank subsidiary companies set up to handle such loans. Insurance companies loan only to their customers with high credit scores. As a consequence, they can be a low-cost source from which to borrow money. Policyholders who have cash-value life insurance policies can obtain loans based on the cash values built up in their policies. An advantage to borrowing on a cash-value life insurance policy is that the interest rates are low, ranging from 4 to 6 percent even though the policyholders actually borrow their own money. Many people fail to pay back such loans because no fixed schedule of repayment is established and insurance companies do not pressure borrowers to repay the debt. If the insured person dies before repaying the loan, the life insurance company will deduct the amount of the loan from the amount that would otherwise be paid on the policy.
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Bridging loans can be arranged for any sum between £25000 to a few million pounds and can be borrowed for periods from a week to up to six months.
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