Suppose that you are graduating from college and about to start work at
that high-paying job you were offered. You may decide that your first pur-
chase must be a car. If you are not mechanically inclined, you may opt
to buy a new one. The problem, of course, is that you do not have the
$20,000 needed for the purchase. A finance company may come to your
rescue. Most automobile financing is provided by finance companies owned
by the automobile companies.
Now suppose that you have gone to work and your first assignment is to
acquire a new piece of equipment. After doing some math, you may decide
that the company should lease the equipment. Again, you may find yourself
dealing with another type of finance company.
Later, you are asked to see what you can do to increase your company’s
liquidity. You may again find that finance companies can help by purchasing
your accounts receivable in a transaction called factoring.
It is clear that finance companies are an important intermediary to many
segments of the economy. In this chapter we discuss the different types of
finance companies and describe what they do.
History of Finance Companies
The earliest examples of finance companies date back to the beginning of the
1800s when retailers offered installment credit to customers. With an install-
ment credit agreement, a loan is made that requires the borrower to make a
series of equal payments over some fixed length of time. Prior to installment
credit agreements, loans were usually of the single-payment or balloon type.
A balloon loan requires the borrower to make a single large payment at the
C H A P T E R
loan’s maturity to retire the debt. Installment loans appealed to consumers because
they allowed them to make small payments on the loan out of current income.
Finance companies came into their own when automobile companies began mass
marketing. In the early 1900s, banks did not offer car loans because cars were con-
sidered consumer purchases rather than productive assets. Many people