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Chapter 22
Consumer Finance
Operations
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline
Types of finance companies
Sources of finance company funds
Uses of finance company funds
Regulation of finance companies
Risks faced by finance companies
Captive finance subsidiaries
Valuation of a finance company
Interaction with other financial institutions
Participation in financial markets
Multinational finance companies
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Types of Finance Companies
Consumer finance companies focus on providing
direct loans to consumers
Their main source of funds is long-term loans
Their main use of funds is providing relatively small loans
Sales finance companies concentrate on purchasing
credit contracts from retailers and dealers
Their main source of funds is commercial paper
Their main use of funds is providing relatively large loans
Commercial finance companies have been created to
provide loans to firms that cannot obtain financing from
commercial banks
It is difficult to classify most finance companies as a
particular type today
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Sources of Finance Company
Funds
Loans from banks
Finance companies commonly borrow from commercial banks
and can consistently renew the loans over time
Some finance companies use bank loans mainly to
accommodate seasonal swings in their business
Commercial paper
Only the most well-known finance companies have been able to
issue commercial paper
As secured commercial paper has become more popular, most
finance companies have access to this market
Most finance companies issue commercial paper using
commercial paper dealers
The best-known finance companies can issue commercial paper
through direct placement
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Sources of Finance Company
Funds (cont’d)
Deposits
Some states allow finance companies to offer customer
deposits similar to those of depository institutions
Bonds
The decision to issue bonds versus some alternative short-term
financing depends on the company’s balance sheet and
expectations about future interest rates
When assets are less rate sensitive than liabilities and interest
rates are expected to increase, bonds provide financing that is
insulated from rising market rates
Capital
Finance companies can build capital by retaining earnings or by
issuing stock
Finance companies maintain a low level of capital