How do finance companies make money? This question is asked by many people who are new to the financial sector. Unlike banks and credit unions, financial companies make their money in different ways.
One way financial companies make their money is through loans. Finance companies do not accept deposits as a form of making money. Issuing a loan to someone comes with interests rates. These interest rates are what makes the finance company their money. Depending on what a person’s credit score is determines what kind of interest rate they will receive on their loan. The loan is fixed for a certain number of years and the finance company gradually receives their money back over that time with interest. Automobile companies and sometimes furniture companies will offer a line of credit through a finance company.
Investors into a finance company is crucial for any company to start their business. A loan company can not begin to offer loans without some capital behind them. In this case, banks are a good example of this. People who put their money into a checkings or savings account are essentially allowing the banks to use their money to offer loans. Banks have to keep the money ready for anyone who has a checkins or savings account with them because they reserve the right to withdraw the entire amount of the account at any time. Putting your money into an account with a bank will not gain you much interest. A savings account has very low interest rates for the money saved into that account. If you are investing in the company you are giving up access to that amount of money over a certain period of time.
There are a variety of different fees that come along with finance companies. A very common type of fee is an application fee. An application fee is applied when someone seeks to take out a loan. This type of fee could be included in the loan itself or as a separate fee altogether. ATM fees are a common obstacle that financial companies charge for. If you are looking to access your money from an ATM that is not owned by your bank, then you will most likely be paying a service fee for the convenience. Penalty fees apply when someone overdraws from their account, misses or is late on a loan payment. These fees can add up and as a consumer you will want to be conscious of what kind of money you have in your account and when your loan payments are due to avoid these kinds of fees.