1. 1 CHAPTER 22 Consumer Finance Operations

2. 2 CHAPTER 22 OVERVIEW This chapter will: A. Identify the main sources and use of finance company funds B. Describe risks faced by finance companies

3. 3 Finance Companies 1. Finance companies provide short- and intermediate-term credit to consumers and small businesses. 2. Independently owned or subsidiaries of large financial institutions or corporations such as General Motors, Ford Motor, Citigroup,

4. Types of Finance Companies a. Consumer finance companies provide financing for customers of retail stores or wholesalers, or mortgage loans. b. Business finance companies provide loans to small businesses. c. Captive Finance Subsidiaries subsidiary to finance sales of the parent company’s products and services. (automobile industry) 4

5. Advantages of Captive Finance Subsidiaries (CFS) 1. separate manufacturing and retailing activities from financing activity. 2. CFS has no reserve requirements. 3. Help to promote sales. 5

6. 6 Sources of Finance Company Funds a. Loans from banks b. Commercial paper c. Deposits d. Bonds e. Capital

7. 7 Uses of Finance Company Funds a. Consumer Loans b. Business Loans and Leasing c. Real Estate Loans

8. Exhibit 22.1 How Finance Companies Finance Economic Growth

9. 9 Risks Faced by Finance Companies 1. Liquidity Risk 2. Interest Rate Risk 3. Credit Risk

10. 10 Valuation of a Finance Company Factors That Affect Cash Flows a. Economic Growth b. Change in the Interest Rates c. Change in Industry Conditions