review2 - Chapter 6 1. Finance Companies a. Make loans to...

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Chapter 6 1. Finance Companies a. Make loans to individuals and corporations b. Sources of funds: i. Do not accept deposits but borrow short and long term debt 1. Commercial paper issuing and bonds to finance loans 2. CP is becoming part of MF’s and pensions c. Hold more equity because hey are debt reliant to fend of solvency d. They are less regulated than banks because they do not rely on deposits 2. Types of finance companies a. Sales finance institutions- i. Loans to customers of a particular retailer or manufacturer- furniture b. Personal credit institutions- i. Making installment loans to consumers, American express, discovery ii. Retail loans iii. Usually mortgages- interest is tax deducible, asset backed 1. Popular because rates are low and house values increase c. Business credit institutions i. Provide specialty financing- equipment leasing and factoring to corporations 1. Factoring- buying accounts receivable and being responsible for the collection of them, debt collectors 3. Types of consumer loans: a. Rates charged by finance companies have a higher rate because they are not backed by insured deposits and they can lend to higher risk customers b. Motor vehicle loans and leases i. Largest share, c. Revolving consumer loans (credit Cards) d. Consumer loans 4. Equity loans and securitized mortgage assets a. Securitized mortgage assets i. Created when the mortgage originator- banks or finance companies- sell mortgages to an organization that pools them. Mortgages are pooled together by similar aspects to create securities with cash flows derived from the underlying mortgages and then purchased by finance companies b. Equity loans- i. Popular because the interest is tax deductible for the borrower, these loans are often used to pay off debt that doesn’t have the tax benefit ii. Increasing real estate values- equity has increased along with the home values, low interest rates make it attractive to borrow against the equity
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5. Finance companies VS. commercial banks a. Finance company advantages: are not subject to regulations that restrict the types of products they offer b. They don’t accept deposits, they don’t have the sever regulatory monitoring and the associated costs c. If they are captive finance companies they may have more expertise or offer lower interest rates as incentive to increase sales d. Finance companies are not funded by deposits and are more willing to take on riskier customers e. Have less overhead than commercial banks 6. Business Loans a. Retail and wholesale motor vehicle and leases- buying a car b. Equipment loans- i. Constitute more than half of business loans c. Business receivables- buying accounts receivable d. Securitized loans of these types- packaging of these types of loans 7. Finance Companies a. Lend at a higher rate than they borrow- similar to commercial banks i. Financed by issuing commercial paper and debt b. Risk: using commercial paper is hard in times of economic recession i.
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review2 - Chapter 6 1. Finance Companies a. Make loans to...

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