Finance companies are nondepository financial institutions with the primary business of providing debt or lease financing to consumers and businesses. In 2015, they held $747 billion in consumer credit, $160 billion in real estate debt, and $405 billion in business credit. The industry is the third largest supplier of consumer credit after banks and other institutions. They account for about one-third of consumer motor vehicle debt and a significant portion of the residential mortgage market.
Finance companies make loans to individuals and businesses and make a profit by charging higher interest rates than banks. In general, they are not regulated, and many finance companies market their products as credit cards, such as unsecured personal loans. Nonetheless, it is important to understand the terms and conditions before signing a loan agreement with a finance company.
The Federal Reserve benchmarks the finance company industry using balance sheet data. This data shows that the majority of these companies are small firms. In 2015, more than half had assets less than $1 million, and 82 percent had assets under $10 million. However, these small firms only made up a very small portion of the overall industry’s assets. By contrast, the largest firms accounted for 71 percent of the industry’s total assets.
Finance companies provide a range of services to consumers, including loans, mortgages, and insurance. As a result, the health of the financial industry affects the health of the economy as a whole. A weak financial sector hurts the average consumer and will limit the growth of small businesses and real estate. In recent years, financial stocks have become a popular investment option for investors, because they pay dividends and are evaluated on their overall health. However, during the financial crisis of 2007-2008, they took a major hit. Since then, however, the financial sector has recovered considerably.