Consumer finance
Encyclopedia
Alternative financial services
in the United States refers to a particular type of financial service, namely sub-prime lending (that is lending to people with relatively poor credit) by non-bank financial institution
s. This branch of the financial services industry is more extensive in the United States than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit rating
s than their counterparts in many other countries. Examples of these companies include American General Finance
, Inc.,Duvera Financial, Inc., Lendmark Financial Services, Inc., HSBC Finance
, CIT
, CitiFinancial
, Wells Fargo Financial
, and Monterey Financial Services, Inc. The more generic name "consumer finance" is also used, although more properly the term applies to financing for any type of consumer.
. Instead, they attempted to lend to everyone who would accept their high rates of interest. There were many reasons why certain people would:
Besides charging a higher interest rate to compensate for their risk, consumer finance companies are usually able to operate successfully because their employees are given more flexibility in structuring loans and in collections than banks. Consumer finance companies may also require far less contingent liabilities than banks.
Critics also consider the concept and geographical placement of consumer finance stores as a form of "redlining
". This is because the sub prime lenders in poorer communities will often be the only local store, yet will be higher priced.
Alternative financial services
Alternative financial services are financial services provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance...
in the United States refers to a particular type of financial service, namely sub-prime lending (that is lending to people with relatively poor credit) by non-bank financial institution
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
s. This branch of the financial services industry is more extensive in the United States than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
s than their counterparts in many other countries. Examples of these companies include American General Finance
American General Finance
Springleaf Financial Inc. , an 80% subsidiary of Fortress Investment Group, is a provider of consumer loans, retail financing and other credit related products. Springleaf is based in Evansville, IN, with branch locations in 40 states, the United Kingdom, Puerto Rico and the U.S...
, Inc.,Duvera Financial, Inc., Lendmark Financial Services, Inc., HSBC Finance
HSBC Finance
HSBC Finance Corporation is a financial services company and a member of the British HSBC Group. It is the sixth-largest issuer of MasterCard and Visa credit cards in the United States...
, CIT
CIT Group Incorporated
CIT Group Inc. is a United States bank holding company founded in 1908 with more than $35 billion in finance and leasing assets. It provides financing and leasing capital to its more than one million small business and middle market clients and their customers across more than 30 industries...
, CitiFinancial
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, Wells Fargo Financial
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
, and Monterey Financial Services, Inc. The more generic name "consumer finance" is also used, although more properly the term applies to financing for any type of consumer.
The term as used in the United States
The Consumer Finance industry (meaning branch-based subprime lenders) mainly came to fruition in the middle of the twentieth century. At that time, these companies were all stand-alone companies not owned by banks and an alternative to banks. However, at that time, the companies were not focused on subprime lendingSubprime lending
In finance, subprime lending means making loans to people who may have difficulty maintaining the repayment schedule...
. Instead, they attempted to lend to everyone who would accept their high rates of interest. There were many reasons why certain people would:
- Banks made it difficult to obtain personal credit. Banks did not have the wide variety of programs or aggressive marketing that they do today.
- Many people simply didn't like to deal with bank employees and branches, preferring the more relaxed environment of a consumer finance company.
- Consumer finance companies focused on lowering the required monthly payment for their customer's debts. Many customers would gladly refinance $10,000.00 worth of auto loan debt at 7 percent interest in a home equity loan at 18 percent interest because the auto loan would have to be paid off in 5 years while the home equity loan would have a 20 year repayment plan, making the required monthly payments for the customer lower (even though overall, the customer would end up paying dramatically more).
Besides charging a higher interest rate to compensate for their risk, consumer finance companies are usually able to operate successfully because their employees are given more flexibility in structuring loans and in collections than banks. Consumer finance companies may also require far less contingent liabilities than banks.
Controversial practices of the United States consumer finance industry
The more dubious consumer finance companies are known to engage in the following practices:- Failing to tell people who ask for a loan from the lender that they really have good credit and can get a better deal somewhere else (a subprime loan is usually more expensive than a prime loan). This is one of the primary criticisms of the industry and is implied in many other's critiques. For example, consumer finance companies have been called racist because of branches they might have opened in primarily African American areas. If their customers all had bad credit they would be working in the same way they would elsewhere, but it is implied that they are preying on the communities' lack of knowledge of lower priced alternatives.
- Sending live checks through the mail which, when used, become loans. This can trick some people, and the interest rate is usually purposely high (although disclosed).
- Charging very high fees on a mortgage refinance.
- Offering refinance deals that are worse than the previous loan, usually by showing that the new payment will be lower, but not revealing that the new payment does not include taxes and insurance.
- Selling single premium credit insuranceCredit insuranceCredit insurance is a term used to describe both business credit insurance and consumer credit insurance, e.g., credit life insurance, credit disability insurance Credit insurance is a term used to describe both business credit insurance (a.k.a. trade credit insurance) and consumer credit...
, also financing that into the loan
Critics also consider the concept and geographical placement of consumer finance stores as a form of "redlining
Redlining
Redlining is the practice of denying, or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain, often racially determined, areas. The term "redlining" was coined in the late 1960s by John McKnight, a...
". This is because the sub prime lenders in poorer communities will often be the only local store, yet will be higher priced.
See also
- Community Financial Services Association of AmericaCommunity Financial Services Association of AmericaThe Community Financial Services Association of America is the national organization dedicated to advancing financial empowerment for consumers through small dollar, short-term loans...
- Settlement (finance)Settlement (finance)Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
- SarakinSarakinis a Japanese term for a legal moneylender who makes unsecured loans at high interest. It is a contraction of the Japanese words for salaryman and loan...
- UnderbankedUnderbankedThe underbanked are people or businesses that have poor access to mainstream financial services such as banks and so rely upon alternative financial services targeted at poor people such as cheque cashers, loan sharks and pawnbrokers They may be distinguished from the unbanked who have no banking...
External links
- Christopher Choe (2009), Bringing in the Unbanked off the Fringe: The Bank on San Francisco Model and the Need for Public and Private Partnership, Seattle Journal for Social Justice, 8(1)