Definition
A finance company is a lending institution that provides higher interest loans to consumers passed over by commercial banks.
Analysis
Finance companies fill a niche of second tier lending. Most of their clients have blemished credit and are considered subprime borrowers. Many of their customers have either been denied credit at big banks or are intimidated by mainstream lenders that may not maintain a local branch office.
Finance companies tend to offer interest rates that are somewhat higher than what big banks charge. Finance companies offer substantially better rates than payday lenders. Loans are typically for vehicles, furniture or personal loans.
Unlike loans from mainstream lenders, finance company loans do not generate much positive effect on credit scores. Any missed payments can cause drops in a credit score similar to other types of accounts.
Some of the largest finance companies in the U.S. include HSBC Finance, CIT, Wells Fargo Financial, Citifinancial and American General Finance.
