finance company

an institution engaged in such specialized forms of financing as purchasing accounts receivable, extending credit to retailers and manufacturers, discounting installment contracts, and granting loans with goods as security.

[1925-30]

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Specialized financial institution that supplies credit for the purchase of consumer goods and services.

Finance companies purchase unpaid customer accounts at a discount from merchants and collect payments due from customers. They also grant small loans directly to consumers at a relatively high rate of interest.

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▪ financial institution

      specialized financial institution that supplies credit for the purchase of consumer goods and services by purchasing the time-sales contracts of merchants or by granting small loans directly to consumers. Specialized consumer-finance agencies now operate throughout western Europe, Canada, the United States, Australia, Japan, and some Latin American countries. Although they existed in the early 1900s, their greatest development came after World War II.

      Large-sales finance companies, which operate by purchasing unpaid customer accounts at a discount from merchants and collecting payments due from consumers, were a response to the need for installment financing for the purchase of automobiles in the early 1900s. The General Motors Acceptance Corporation, for example, was established in 1919 to purchase automobile accounts receivable from car dealers who were themselves unable to finance time purchases. Many companies in both Europe and America continue to specialize in financing purchases of particular commodities and remain closely associated with specific manufacturers. Some also extend credit for wholesale purchases by retail dealers.

      Consumer (consumer credit) finance or small-loan companies also arose in the 1900s. Until then, the need for consumer loans had been met primarily by illegal “loan shark” activities because it was unprofitable for banks to make small loans at rates below legally set usury levels. In 1911 several states in the United States began adopting small-loan laws that authorized loans to consumers at rates above usury levels, making it financially practical to operate a consumer-loan business. Today many companies engage both in the sales-finance business and in making loans directly to consumers.

      In some countries, including Belgium, Denmark, and Norway, commercial banks (bank) have also become important as a direct source of consumer credit. In many other countries, they are important as a source of capital for specialized finance companies. Many finance companies in Great Britain, Australia, and The Netherlands, for example, have become closely affiliated with commercial banks because of the banks' role as capital subscribers. In other cases, commercial banks play an important role in their extension of credit to finance companies.

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