Lending Finance

Lending finance can mean any number of sub-fields of finance. The term generally refers to borrowing.

SUBPRIME LENDING

Subprime lending is the business practice of extending loans to the most risky of credit borrowers. There is no standard definition what what makes a borrower subprime, however generally speaking these individuals have FICO credit scores under 640. A loan can also be classified as subprime based on the sum of the following factors:

  • The size of the loan
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  • The structure of the loan
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  • The FICO score of the borrower
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  • The borrower’s debt to income ratio
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  • The ratio of loan value to collateral (down payment)
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    Subprime lending includes mortgages, auto loans, and even credit cards.

    CONSUMER FINANCE

    Consumer finance is a more broad term of lending and it refers to any financing extended to consumers.

    CAPITAL LENDING

    Capital lending is the process by which a large company or corporation offers financing on large ticket items. Most major corporations have established finance divisions (subsidiaries) that help a consumer purchase their product. Many companies have been forced into offering capital lending because their competition offers it.

    Capital lending is similar to consumer finance. It was pioneered by General Motors and Ford in the late 1920’s. The practice has spread to industries and corporations around the world. The primary difference between capital lending and consumer finance is that capital lending is aimed small businesses whereas consumer finance is aimed at consumers. Consumer finance is generally used for depreciating assets whereas capital lending is used for purchasing capital assets. A capital asset is one that will pay for itself through means of production.

    PREDATORY LENDING

    The term predatory lending is used to refer to deceptive, fraudulent, or unfair lending during the loan origination (pre-approval) process. Predatory lending usually happens with loans that are backed by some kind of collateral (a car or house). If the credit borrower defaults on the loan, the lender takes possession of the collateral by means of foreclosure or repossession. The lender keeps any payments made up to the point of default, sells the asset, and the combination of the 2 results in substantial profit for the lender.