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Lecture Financial markets and institutions - Chapter 22: Consumer finance operations

In this chapter includes content: Types of finance companies, sources of finance company funds, uses of finance company funds, regulation of finance companies, risks faced by finance companies, risks faced by finance companies, valuation of a finance company, interaction with other financial institutions, participation in financial markets, multinational finance companies. | 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. 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 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 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 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 | 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. 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 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