Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.
Method 1 Reducing Finance Charges for a New Loan.
1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.
Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.
If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.
Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.
2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.
3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.
4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.
5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.
the lease costs at the beginning, middle, and end of the leasing period.
what leasing offers and terms are available to you.
how long you want to keep the automobile.
Method 2 Refinancing an Existing Loan.
1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.
2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:
your current interest rate.
how much money is still owed on the existing loan.
how many months remain in the existing loan's terms.
the make, model, and current odometer reading of your vehicle.
the current value of your vehicle.
your current income and employment history.
your current credit score.
3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:
the loan rate.
the duration of the loan.
whether there are pre-payment penalties or late payment penalties.
any fees or finance charges.
what (if any) the conditions for automobile repossession are with a given lender.
Method 3 Pre-paying an Existing Loan.
1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.
2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.
3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:
the total number of months in your existing loan term.
the number of months remaining on your existing loan.
the amount your existing loan was for.
the monthly payments remaining on your loan.
the current annual interest rate (APR) on your existing loan.
Tips.
Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.
Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.
Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.
Method 1 Reducing Finance Charges for a New Loan.
1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.
Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.
If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.
Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.
2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.
3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.
4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.
5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.
the lease costs at the beginning, middle, and end of the leasing period.
what leasing offers and terms are available to you.
how long you want to keep the automobile.
Method 2 Refinancing an Existing Loan.
1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.
2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:
your current interest rate.
how much money is still owed on the existing loan.
how many months remain in the existing loan's terms.
the make, model, and current odometer reading of your vehicle.
the current value of your vehicle.
your current income and employment history.
your current credit score.
3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:
the loan rate.
the duration of the loan.
whether there are pre-payment penalties or late payment penalties.
any fees or finance charges.
what (if any) the conditions for automobile repossession are with a given lender.
Method 3 Pre-paying an Existing Loan.
1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.
2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.
3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:
the total number of months in your existing loan term.
the number of months remaining on your existing loan.
the amount your existing loan was for.
the monthly payments remaining on your loan.
the current annual interest rate (APR) on your existing loan.
Tips.
Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.
Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.
How to Calculate Finance Charges on a New Car Loan.
While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.
Part 1 Clarifying the Terms of Your Loan.
1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.
This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.
2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.
Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.
3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.
Part 2 Calculating Your Monthly Finance Charges.
1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.
2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.
3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.
4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.
The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).
In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):
Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.
Monthly payment = $140/(1-(1.007)^-60).
Monthly payment = $140/(1-0.658).
Monthly payment = $140/0.342.
Monthly payment = $409.36 (this number may be off by a few cents due to rounding).
5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.
6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.
Part 3 Calculating Your Loan's Total Finance Charges.
1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.
2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.
So, in our example, this would be.
$409 x 60 - $20,000 = Total amount of finance charges.
$24,540 - $20,000 = Total amount of finance charges.
Total amount of finance charges = $4,540.
3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.
Tips.
Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.
Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.
The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.
With good credit and a large down payment, it may be possible to get a car loan with 0% APR.
Warnings.
While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.
How to Calculate Finance Charges on a New Car Loan.
While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.
Part 1 Clarifying the Terms of Your Loan.
1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.
This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.
2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.
Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.
3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.
Part 2 Calculating Your Monthly Finance Charges.
1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.
2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.
3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.
4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.
The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).
In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):
Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.
Monthly payment = $140/(1-(1.007)^-60).
Monthly payment = $140/(1-0.658).
Monthly payment = $140/0.342.
Monthly payment = $409.36 (this number may be off by a few cents due to rounding).
5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.
6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.
Part 3 Calculating Your Loan's Total Finance Charges.
1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.
2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.
So, in our example, this would be.
$409 x 60 - $20,000 = Total amount of finance charges.
$24,540 - $20,000 = Total amount of finance charges.
Total amount of finance charges = $4,540.
3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.
Tips.
Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.
Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.
The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.
With good credit and a large down payment, it may be possible to get a car loan with 0% APR.
Warnings.
While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.
If you are late paying off the balance of your credit card, you will likely incur further finance charges on the balance until it is paid. The best way to avoid these charges is to pay off the balance on time. You will often get a grace period of around 21 days after receiving the bill in which to do this. If you just pay off the minimum you will be incurring more and more interest and it will take you a long time to pay off the debt.
Method 1 Clearing Your Card Balance.
1. Pay off your balance at the end of every billing cycle. The most straight-forward way to avoid charges on the balance of your credit card is to pay it off in full at the end of each billing cycle. Paying off the whole balance by the due date on your bill will mean that you do not incur any additional finance charges on the balance.
Paying the balance of on time will also help your credit rating improve over time.
2. Determine if you have a grace period. Once you receive your bill, you will often have a grace period in which you can pay it off without incurring charges. These vary depending on what credit card deal you have, so you will have to check the details of your specific account. The typical grace period tends to be around 25 days.
If your card does have a grace period, your card provider must give you at least 21 days after your bill is mailed for you to pay it off.
3. Pay off the balance within your grace period. If your card has a grace period, you must pay off the balance in full before the end of this period to avoid any finance charges. If the grace period is 21 days, make sure you pay off the balance in advance of the due date. You can make the payment up to 5pm on the last day without incurring charges.
Make your payments in plenty of time so that you don’t accidentally miss the deadline.
If you mail your payment, allow 7 to 10 days for the payment to be applied to your account.
For online banking, check with your bank. It can be the same day, or it can take three working days. It’s best to be safe, so pay it off early if possible.
4. Consider transferring the balance to another card. If you are unable to pay off the balance within your grace period, there is an alternative way to clear the balance. You may be able to transfer the balance to another credit card, with a lower APR. For example, some cards will give you 0% APR for a limited time. In this specified period you will not have to pay any finance charges, so you will be able to pay the balance off more cheaply.
If you are considering this, it is important that you are careful and conscientious with your finances.
After the 0% APR period expires you may have to pay a higher rate of interest, so you should be completely sure of the terms and conditions.
If you transfer the balance from one card to another, remember that you have not paid off the debt. Don’t do this just to free up the card to take on more debt.
Method 2 Finding the Best Credit Card Deal.
1. Choose credit cards that do not charge annual service charges. There are numerous charges and fees connected to credit cards that you cannot avoid by paying off the balance on time. These include annual fees that are incurred regardless of how much you use the card. By shopping around you can find a card that doesn’t have these unavoidable service charges.
You can search through a database of hundreds of credit card agreements that are available from a variety of companies online.
The database is available on the website of the Consumer Financial Protection Bureau here: http://www.consumerfinance.gov/credit-cards/agreements/
2. Read the fine print. It’s important that you spend some time reading up on the all small print before you sign up for a credit card. Read it again before you activate a card, and call the company if you don't understand something. Be sure you know the interest rate and how finance charges are determined. Find out if there are ways for the lender to raise the interest rate, and if anything seems questionable, avoid working with that company.
Check to see what fees there are for balance transfers.
When you use the "checks" that arrive with your bill, these are considered balance transfers and are often subjected to additional fees.
3. Determine whether there is a universal default clause. When you are looking at different credit card agreements you should note whether or not they have a universal default clause. This type of clause gives the credit card company the right to raise the interest rate on your card if you are late paying your credit card bill or any other creditor. The credit card provider can monitor your credit report and alter your rates during the contract.
This clause can also be activated for a high debt-to-income ratio.
Remember that a higher interest rate or APR on your card results in high finance charges.
If you have a card with this clause, pay all your bills on time.
Question : I have never missed minimum due date, but still there is a finance charge. Is it because of the outstanding balance, or is the bank cheating me? Answer : In all likelihood, the bank is not cheating you. If you fail to pay the full balance due before the due date, you will pay finance charges, which usually consist of interest on the unpaid balance.
Question : If the bank is closed on the first 3 days of month, can they charge the full month's interest when you were not able to contact them previous 3 days? Answe : Yes. Some purchases compound interest monthly, and once the month has started, you could owe interest for the next 30 days. It's just like when you mail a check: it is credited on the day it is received, which would not be on a weekend or holiday.
Question : If my account has been closed but I still have a balance, can I avoid paying the finance charge? Answer : You can try to negotiate with the credit card company for a payment plan that doesn't involve finance charges or a lump sum payoff but typically you will continue to pay interest as long as you have a balance.
Question : Do I get a personal loan on the basis of my credit card score? Answer : A lender will consider your credit score as well as your credit history, work history and current income.
Question : If I pay total unbilled amount before due date, can I use my credit limit the next day? Answer : You should wait until the card issuer has acknowledged receipt of your payment.
Question : If I paid all the outstanding balance, is there any finance charges? Answer : It's possible there are finance charges left over from before you paid off the balance. If you pay off the full balance on time, there will be no further finance charges placed on your account after that point. If you keep paying the balance down to zero on time every month, you will not see any more finance charges.
Tips.
Check your credit report annually and correct any erroneous information. Some creditors use information obtained in credit reports to increase the finance charge percentage charged.
If you are late paying off the balance of your credit card, you will likely incur further finance charges on the balance until it is paid. The best way to avoid these charges is to pay off the balance on time. You will often get a grace period of around 21 days after receiving the bill in which to do this. If you just pay off the minimum you will be incurring more and more interest and it will take you a long time to pay off the debt.
Method 1 Clearing Your Card Balance.
1. Pay off your balance at the end of every billing cycle. The most straight-forward way to avoid charges on the balance of your credit card is to pay it off in full at the end of each billing cycle. Paying off the whole balance by the due date on your bill will mean that you do not incur any additional finance charges on the balance.
Paying the balance of on time will also help your credit rating improve over time.
2. Determine if you have a grace period. Once you receive your bill, you will often have a grace period in which you can pay it off without incurring charges. These vary depending on what credit card deal you have, so you will have to check the details of your specific account. The typical grace period tends to be around 25 days.
If your card does have a grace period, your card provider must give you at least 21 days after your bill is mailed for you to pay it off.
3. Pay off the balance within your grace period. If your card has a grace period, you must pay off the balance in full before the end of this period to avoid any finance charges. If the grace period is 21 days, make sure you pay off the balance in advance of the due date. You can make the payment up to 5pm on the last day without incurring charges.
Make your payments in plenty of time so that you don’t accidentally miss the deadline.
If you mail your payment, allow 7 to 10 days for the payment to be applied to your account.
For online banking, check with your bank. It can be the same day, or it can take three working days. It’s best to be safe, so pay it off early if possible.
4. Consider transferring the balance to another card. If you are unable to pay off the balance within your grace period, there is an alternative way to clear the balance. You may be able to transfer the balance to another credit card, with a lower APR. For example, some cards will give you 0% APR for a limited time. In this specified period you will not have to pay any finance charges, so you will be able to pay the balance off more cheaply.
If you are considering this, it is important that you are careful and conscientious with your finances.
After the 0% APR period expires you may have to pay a higher rate of interest, so you should be completely sure of the terms and conditions.
If you transfer the balance from one card to another, remember that you have not paid off the debt. Don’t do this just to free up the card to take on more debt.
Method 2 Finding the Best Credit Card Deal.
1. Choose credit cards that do not charge annual service charges. There are numerous charges and fees connected to credit cards that you cannot avoid by paying off the balance on time. These include annual fees that are incurred regardless of how much you use the card. By shopping around you can find a card that doesn’t have these unavoidable service charges.
You can search through a database of hundreds of credit card agreements that are available from a variety of companies online.
The database is available on the website of the Consumer Financial Protection Bureau here: http://www.consumerfinance.gov/credit-cards/agreements/
2. Read the fine print. It’s important that you spend some time reading up on the all small print before you sign up for a credit card. Read it again before you activate a card, and call the company if you don't understand something. Be sure you know the interest rate and how finance charges are determined. Find out if there are ways for the lender to raise the interest rate, and if anything seems questionable, avoid working with that company.
Check to see what fees there are for balance transfers.
When you use the "checks" that arrive with your bill, these are considered balance transfers and are often subjected to additional fees.
3. Determine whether there is a universal default clause. When you are looking at different credit card agreements you should note whether or not they have a universal default clause. This type of clause gives the credit card company the right to raise the interest rate on your card if you are late paying your credit card bill or any other creditor. The credit card provider can monitor your credit report and alter your rates during the contract.
This clause can also be activated for a high debt-to-income ratio.
Remember that a higher interest rate or APR on your card results in high finance charges.
If you have a card with this clause, pay all your bills on time.
Question : I have never missed minimum due date, but still there is a finance charge. Is it because of the outstanding balance, or is the bank cheating me?
Answer : In all likelihood, the bank is not cheating you. If you fail to pay the full balance due before the due date, you will pay finance charges, which usually consist of interest on the unpaid balance.
Question : If the bank is closed on the first 3 days of month, can they charge the full month's interest when you were not able to contact them previous 3 days?
Answe : Yes. Some purchases compound interest monthly, and once the month has started, you could owe interest for the next 30 days. It's just like when you mail a check: it is credited on the day it is received, which would not be on a weekend or holiday.
Question : If my account has been closed but I still have a balance, can I avoid paying the finance charge?
Answer : You can try to negotiate with the credit card company for a payment plan that doesn't involve finance charges or a lump sum payoff but typically you will continue to pay interest as long as you have a balance.
Question : Do I get a personal loan on the basis of my credit card score?
Answer : A lender will consider your credit score as well as your credit history, work history and current income.
Question : If I pay total unbilled amount before due date, can I use my credit limit the next day?
Answer : You should wait until the card issuer has acknowledged receipt of your payment.
Question : If I paid all the outstanding balance, is there any finance charges?
Answer : It's possible there are finance charges left over from before you paid off the balance. If you pay off the full balance on time, there will be no further finance charges placed on your account after that point. If you keep paying the balance down to zero on time every month, you will not see any more finance charges.
Tips.
Check your credit report annually and correct any erroneous information. Some creditors use information obtained in credit reports to increase the finance charge percentage charged.
Finance companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers can include retail stores, small businesses or large firms. Commercial loans can help established businesses construct a new office or retail space, or they can help new business get up and running. Personal loans for individual customers can include home equity loans, student loans and auto loans. Starting a finance company requires not only a thorough understanding of your target customer's needs and a comprehensive product line, but also a solid business plan that outlines how you will make your company successful. In addition,any new finance company must comply with strict state and federal regulations and meet initial funding requirements.
Part 1 Identifying the Finance Company Business Model
1. Select a finance company specialty. Finance companies tend to specialize in the types of loans they make as well as the customers they serve. The financial, marketing, and operational requirements vary from one specialty to another. Focusing on a single business model is critical to the successful creation and operation of a new company. Private finance companies range from the local mortgage broker who specializes in refinancing or making new loans to homeowners to the factoring companies (factors) that acquire or finance account receivables for small businesses. The decision to pursue a specific finance company specialty should be based upon your interest, your experiences, and the likelihood of success.
Many finance companies are founded by former employees of existing companies. For example, former loan officers, underwriters, and broker associates create new mortgage brokerage firms specializing in a specific type of loan (commercial or residential) or working with a single lender.
Consider the business specialty that attracted you initially. Why were you attracted to the business? Does the business require substantial start-up and operating capital?
Is there an opportunity to create the same business in a new area? Will you be competing with other similar, existing businesses?
2. Confirm the business opportunity. A new finance company must be able to attract clients and produce a profit. As a consequence, it is important to research the expected market space where the business will compete. How big is the market? Who presently serves potential clients? Are prices stable? Is the market limited to a specific geographic area? How do existing companies attract and serve their customers? How do competitors differ in their approach to marketing and service features?
Identify your target market, or the specific customers you intend to serve. Explain their needs and how you intend to meet them.}}
Describe your area of specialization. For example, if your market research indicates a growing number of small start-up companies needing loans, describe how the financial products and services you offer are strong enough to gain a significant share of that market.
Consider the companies already in the competitive space. Are they similar in size or dominated by a single company? Similar market shares may indicate a slow-growing market or the companies’ inability to distinguish themselves from their competitors.
Tip: Identifying your target market will require you to identify key demographics that are currently underserved and how you plan to draw these customers away from your competitors. You should list who these customers are and how your financial products will appeal to them. Include any advantages you have over competitors.
3. Identify the business requirements. What are the likely fixed costs to operate the business - office space, equipment, utilities, salaries and wages? What business processes are necessary for day-to-day operations - marketing, loan officers, underwriters, clerks and accountants? Will potential clients visit a physical office, communicate online, or both? Will you need a financial partner such as mortgage lender or a bank?
Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion up to a dollar limit. Factors typically leverage their own capital by borrowing from larger financial institutions.
4. Crunch the numbers. How much capital is required to open the business? What is the expected revenue per client or transaction? What is break-even sales volume? Before risking your own and other people’s capital, you need to ensure that profitability is possible and reasonable, if not likely.{{greenbox: Tip: Develop financial projections (pro formas) for the first three years of operation to understand how the business is likely to fare in the real world. The projections should include month to month Income Statements for the first year, and quarterly statements thereafter, as well as 'projected Balance Sheets and Cash Flow Statements.
Part 2 Making a Self Assessment.
1. Identify your skills. Before starting your new company and, possibly, a new career, it is important to objectively evaluate your skills and personality to determine what steps you need to take to successfully start and manage a finance company. Do you have special training in the finance specialty? Do you understand finance and accounting? Do you work well with people? Are you a leader, who inspires others to follow them, or a manager, who can assess a problem, discern its cause, direct resources to implement a solution? Are you a good salesperson? Do you have any special abilities specifically suited to the finance industry?
2. Assess your emotional strengths and interests. Do you work best alone or with others? Do you find it easy to compromise? Are you patient or demanding with others? Do you make quick, intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are an optimist or a pessimist? When you make a mistake, do you beat yourself up or regard it as a learning opportunity and move on?
3. Consider your experience. Have you worked in the finance industry previously? Are you monetarily and professionally successful in your present position? Do you understand marketing, accounting, legal matters, or banking? Have you been responsible for creating new markets or leading sales teams?
4. Determine your financial capacity. Do you have sufficient capital to open the finance company you envision? Do you have assets that can cover your living expenses during a start-up phase? Will your family or friends contribute to the financing of your business? Do you have access to other financial sources - personal loans, venture capital, investment funds, or financial sponsors?
Part 3 Creating a Business Plan.
1. Set up your business plan. The Business Plan serves a number of functions. It is a blueprint for building your company in the future, a guide to ensure you remain focused in your efforts, and a detailed description of your company for potential lenders and investors. Begin writing your business plan by including all of the required sections and leaving room to fill them in. The steps in this part should serve as your sections, starting with the business description.
2. Write a business description. Your business plan will layout a blueprint for your company. The first part of your business, the description, is a summary of the organization and goals of your business. Begin by justifying the need for a new financial company in the industry or target location. You should briefly identify your target market, how you plan to reach them, descriptions of your products and services, and how your company will be organized.
Tip: You should also briefly explain how there is room in the current market for your company (how it will compete against competitors). You should already have this information from your initial market research.
3. Describe the organization and management of your company. Clarify who owns the company. Specify the qualifications of your management team. Create an organizational chart. A comprehensive, well-developed organizational structure can help a financial institution be more successful.
The Chief Executive Office leads the "executive suite" of other company officers.
The Chief Operating Officer manages the activities of the lending, servicing and insurance and investment units of the company.
The Chief Administrative Officer’s responsibilities include marketing, human resources, employee training, facilities, technology and the legal department.
The Chief Financial Officer ensures that the company operates within regulatory parameters. This person also monitors the company’s financial performance.
In smaller companies, executives may fill more than one of these roles simultaneously.
4. Describe your product line. Explain the types of financial products and loans you provide. Emphasize the benefits your products offer to your target customers. Specify the need your product fills in the market.
For example, if your target customers are small business owners, describe how the financial products and investments you offer to help them run their businesses.
5. Explain how your business is financed. Determine how much money you need to start your finance company. Specify how much equity you own. State what percentage other investors own in the company. Indicate how you plan to finance your company with leverage (loans),where these loans are coming from, and how the loans will be used in the business.
In most cases, equity in the company is used primarily for the company's operations, rather than the source of loans to customers. Secondary lenders provide funds to the finance company that is subsequently loaned to customers; the customers' loans collateralize the lenders' loans to the finance company. This is because profit is made in the spread, or the difference between your cost of acquiring capital and profit from lending it out.
Any funding request should indicate how much you need, how you intend to use the money, and the terms of the loan or investment.
6. Document your marketing and sales management strategies. Your marketing strategy should explain how you plan to attract and communicate with both customers and lenders/depositors. It should also show how you plan to grow your company. The sales strategy defines how you will sell your product.
Promotional strategies include advertising, public relations and printed materials.
Business growth opportunities not only include building your staff, but also acquiring new businesses or beginning to offer different kinds of products.
The sales strategy should include information about the size of your sales force, procedures for sales calls and sales goals.
7. Include financial statements in your business plan. Reviewing the pro forma financial statements you created during your business planning, be sure that your projections are reasonable and conservative. You may also want to cautiously estimate performance over the next two years after that. Include a ratio analysis to document your understanding of financial trends over time and predict future financial performance.
Prospective financial data should provide monthly statements for the first year and annual statements for the next two years.
Standard financial ratios include Gross profit margin, ROE, Current ratio, Debt to Equity.
Ratio and trend analysis data helps you document whether you will be able to continue to serve your customers over time, how well you utilize your assets and manage your liabilities, and whether you have enough cash to meet your obligations.
Tip: Add graphs to your analysis to illustrate positive trends.
Part 4 Determining Your Business Structure.
1. Consider forming a Limited Liability Company. A Limited Liability Company (LLC) is similar to a corporation in that it protects its owners from personal liability for debts or actions incurred by the business. However, they have the tax advantages of a sole proprietorship or partnership. A corporation typically files taxes separately from the shareholders.
Be aware that corporations pay double federal income tax, meaning taxes are assessed when profit is earned, and then again when it is distributed to shareholders.
You should seek legal advice to determine the best structure for your business.
2. Name and register your business. Choose a name that represents your brand and is unique enough to obtain a website address or URL. When choosing a name, check with the U.S. Patent and Trademark Office to make sure you are not infringing on any trademarks. Also, check with you state to see if the name is already in use by another corporation.
You will have to register with your state as a corporation. The exact registration process varies by state and type of corporation you decide to form.
Since your business name is one of your most important assets, protect it by applying for trademark protection with the U.S. Patent and Trademark Office.
3. Obtain a require operational licenses and permits. Financial institutions acquire these from the state in which they operate. Consult with your State Business License Office to identify the specific license and permit you need. Each state has different requirements for licensing financial institutions. You will need to specify exactly what type of financial institution you are opening, such as an investment company or a licensed lender. You will then furnish the requisite documents and pay any fees.
Due to the incredibly complex and constantly-evolving nature of the financial services industry, it is advised that finance companies hire and retain expert legal counsel to guide them through these regulations.
Note: You will also need to comply with any permit requirements surrounding your office space, like public and workplace safety regulations and operating permits.
4. Learn about regulations. The two categories of financial regulations in the United States are safety-and-soundness regulation and compliance. Safety-and-soundness regulations protect creditors from losses arising from the insolvency of financial institutions. Compliance regulations aim to protect individuals from unfair dealings or crime from the financial institutions. Financial regulations are carried out by both federal and state agencies.
Federal financial regulation agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Securities and Exchange Commission (SEC).
State regulatory agencies may have additional requirements that are even more stringent than those set by the SEC.
With the help of your legal counsel, investigate reserve and initial funding requirements for your company. This will determine how much startup money you need.
5. Protect yourself from risk and liabilities with indemnity insurance. Indemnity insurance protects you and your employees should someone sue you. Financial institutions should purchase a specific kind of indemnity insurance called Errors and Omissions (E&O) insurance. This protects the financial company from claims made by clients for inadequate or negligent work. It is often required by government regulatory bodies. Remember, however, that staying in compliance with all regulatory requirements is still your responsibility.
Part 5 Setting Up Shop.
1. Obtain financing. You will need to finance your company according to your business plan, using a combination of equity and debt financing. Initial startup costs will be used for meeting reserve requirements and the building or rental of office spaces. From there, much of the company's operating capital will be lent out to customers.
Be aware of Federal and State laws regulating the private solicitation of investors. Adherence to securities laws regarding the information provided to potential investors and the qualifications of the investor will apply in most circumstances.
Sources of debt financing include loans from the government and commercial lending institutions. Money borrowed with debt financing must be paid back over a period of time, usually with interest.
The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, these loans can only be used for the purchase of equipment, not lent out to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan should the business default.
Finance companies face the problem of having to raise large amounts of initial funding to be successful. They also often have to deal with a slew of other challenges before they become profitable. Without accounting properly for issues like fraud, it's very easy for a finance company to go out of business.
Note: Investors may want to provide financing in exchange for equity in the company. This is called equity financing, and it makes the investors shareholders in the company. You don’t have to repay these investors, but you do have to share profits with them.
2. Choose your location. A finance company should make a positive impression on customers. Customers looking for a loan will want to do business in a place that projects a trustworthy and sound image. Take into account the reputation of the neighborhood or of a particular building and how it will appear to customers. Also consider how customers will reach you and the proximity of your competitors. If your target customers are small local businesses, for example, they may not want to drive to a remote location or deal with heavy city traffic to meet with you.
If you are not sure, contact your local planning agency to find out if your desired location is zoned for commercial use, especially if you plan to operate out of your home.
Leasing commercial office space is expensive. Consider your finances, not only what you can afford, but also other expenses such as renovations and property taxes.
In today's connected world, it's also possible to run a finance company online, without a location for physical interaction with customers. While you'll likely still need an office for your employees, not having a retail location can save you some regulatory hassle expense.
3. Hire and retain employees. Write effective job descriptions so employees and applicants understand their role in the company and what your expectations of them are. Compile a compensation package, including required and optional fringe benefits. Compose an employee handbook that communicates company policies, compensation, schedules and standards of conduct.
Perform pre-employment background checks to make informed decisions about whom you hire. Financial planners and advisors require a specific educational background and are subject to rigorous certification requirements. Consider obtaining credit reports to show how financially responsible a candidate is.
4. Pay your taxes. Obtain an Employee Identification Number (EIN) from the IRS. This is also known as your Federal Tax Identification Number. Determine your federal and state tax obligations. State tax obligations include income taxes and employment taxes. All states also require payment of workers' compensation insurance and unemployment insurance taxes, and some also require payment of disability insurance.
5. Create loan packages for your clients. Decide if you are going to offer revolving or fixed-amount types of credit. Think about your target customers and what kinds of loans they would need. Homeowners and individuals may seek mortgages, auto loans, student loans or personal loans. Entrepreneurs may seek small business loans. Consolidated loans may help customers who are struggling to manage their finances.
Recognize that your loan offerings, rates, and terms will need to be constantly reworked with the changing loan market. Some of these items may also be subject to various regulations, so consult your legal counsel before finalizing your offerings.
6. Market your new finance company. Target your marketing efforts towards your chosen niche of clients. Marketing includes networking and advertising, but there are also other ways of letting potential customers know you have set up shop. Become a familiar face in your local business community by attending and speaking at events sponsored by the local chamber of commerce. Publish communications such as a newsletter or e-zine. Participate in social networking on sites like Facebook, LinkedIn and Twitter.
Note: In order to become successful, you'll have to attract both depositors and loan customers, so be sure to offer deals on both ends. Without attracting depositor, you will have no capital to lend out to customers.
Finance companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers can include retail stores, small businesses or large firms. Commercial loans can help established businesses construct a new office or retail space, or they can help new business get up and running. Personal loans for individual customers can include home equity loans, student loans and auto loans. Starting a finance company requires not only a thorough understanding of your target customer's needs and a comprehensive product line, but also a solid business plan that outlines how you will make your company successful. In addition,any new finance company must comply with strict state and federal regulations and meet initial funding requirements.
Part 1 Identifying the Finance Company Business Model
1. Select a finance company specialty. Finance companies tend to specialize in the types of loans they make as well as the customers they serve. The financial, marketing, and operational requirements vary from one specialty to another. Focusing on a single business model is critical to the successful creation and operation of a new company. Private finance companies range from the local mortgage broker who specializes in refinancing or making new loans to homeowners to the factoring companies (factors) that acquire or finance account receivables for small businesses. The decision to pursue a specific finance company specialty should be based upon your interest, your experiences, and the likelihood of success.
Many finance companies are founded by former employees of existing companies. For example, former loan officers, underwriters, and broker associates create new mortgage brokerage firms specializing in a specific type of loan (commercial or residential) or working with a single lender.
Consider the business specialty that attracted you initially. Why were you attracted to the business? Does the business require substantial start-up and operating capital?
Is there an opportunity to create the same business in a new area? Will you be competing with other similar, existing businesses?
2. Confirm the business opportunity. A new finance company must be able to attract clients and produce a profit. As a consequence, it is important to research the expected market space where the business will compete. How big is the market? Who presently serves potential clients? Are prices stable? Is the market limited to a specific geographic area? How do existing companies attract and serve their customers? How do competitors differ in their approach to marketing and service features?
Identify your target market, or the specific customers you intend to serve. Explain their needs and how you intend to meet them.}}
Describe your area of specialization. For example, if your market research indicates a growing number of small start-up companies needing loans, describe how the financial products and services you offer are strong enough to gain a significant share of that market.
Consider the companies already in the competitive space. Are they similar in size or dominated by a single company? Similar market shares may indicate a slow-growing market or the companies’ inability to distinguish themselves from their competitors.
Tip: Identifying your target market will require you to identify key demographics that are currently underserved and how you plan to draw these customers away from your competitors. You should list who these customers are and how your financial products will appeal to them. Include any advantages you have over competitors.
3. Identify the business requirements. What are the likely fixed costs to operate the business - office space, equipment, utilities, salaries and wages? What business processes are necessary for day-to-day operations - marketing, loan officers, underwriters, clerks and accountants? Will potential clients visit a physical office, communicate online, or both? Will you need a financial partner such as mortgage lender or a bank?
Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion up to a dollar limit. Factors typically leverage their own capital by borrowing from larger financial institutions.
4. Crunch the numbers. How much capital is required to open the business? What is the expected revenue per client or transaction? What is break-even sales volume? Before risking your own and other people’s capital, you need to ensure that profitability is possible and reasonable, if not likely.{{greenbox: Tip: Develop financial projections (pro formas) for the first three years of operation to understand how the business is likely to fare in the real world. The projections should include month to month Income Statements for the first year, and quarterly statements thereafter, as well as 'projected Balance Sheets and Cash Flow Statements.
Part 2 Making a Self Assessment.
1. Identify your skills. Before starting your new company and, possibly, a new career, it is important to objectively evaluate your skills and personality to determine what steps you need to take to successfully start and manage a finance company. Do you have special training in the finance specialty? Do you understand finance and accounting? Do you work well with people? Are you a leader, who inspires others to follow them, or a manager, who can assess a problem, discern its cause, direct resources to implement a solution? Are you a good salesperson? Do you have any special abilities specifically suited to the finance industry?
2. Assess your emotional strengths and interests. Do you work best alone or with others? Do you find it easy to compromise? Are you patient or demanding with others? Do you make quick, intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are an optimist or a pessimist? When you make a mistake, do you beat yourself up or regard it as a learning opportunity and move on?
3. Consider your experience. Have you worked in the finance industry previously? Are you monetarily and professionally successful in your present position? Do you understand marketing, accounting, legal matters, or banking? Have you been responsible for creating new markets or leading sales teams?
4. Determine your financial capacity. Do you have sufficient capital to open the finance company you envision? Do you have assets that can cover your living expenses during a start-up phase? Will your family or friends contribute to the financing of your business? Do you have access to other financial sources - personal loans, venture capital, investment funds, or financial sponsors?
Part 3 Creating a Business Plan.
1. Set up your business plan. The Business Plan serves a number of functions. It is a blueprint for building your company in the future, a guide to ensure you remain focused in your efforts, and a detailed description of your company for potential lenders and investors. Begin writing your business plan by including all of the required sections and leaving room to fill them in. The steps in this part should serve as your sections, starting with the business description.
2. Write a business description. Your business plan will layout a blueprint for your company. The first part of your business, the description, is a summary of the organization and goals of your business. Begin by justifying the need for a new financial company in the industry or target location. You should briefly identify your target market, how you plan to reach them, descriptions of your products and services, and how your company will be organized.
Tip: You should also briefly explain how there is room in the current market for your company (how it will compete against competitors). You should already have this information from your initial market research.
3. Describe the organization and management of your company. Clarify who owns the company. Specify the qualifications of your management team. Create an organizational chart. A comprehensive, well-developed organizational structure can help a financial institution be more successful.
The Chief Executive Office leads the "executive suite" of other company officers.
The Chief Operating Officer manages the activities of the lending, servicing and insurance and investment units of the company.
The Chief Administrative Officer’s responsibilities include marketing, human resources, employee training, facilities, technology and the legal department.
The Chief Financial Officer ensures that the company operates within regulatory parameters. This person also monitors the company’s financial performance.
In smaller companies, executives may fill more than one of these roles simultaneously.
4. Describe your product line. Explain the types of financial products and loans you provide. Emphasize the benefits your products offer to your target customers. Specify the need your product fills in the market.
For example, if your target customers are small business owners, describe how the financial products and investments you offer to help them run their businesses.
5. Explain how your business is financed. Determine how much money you need to start your finance company. Specify how much equity you own. State what percentage other investors own in the company. Indicate how you plan to finance your company with leverage (loans),where these loans are coming from, and how the loans will be used in the business.
In most cases, equity in the company is used primarily for the company's operations, rather than the source of loans to customers. Secondary lenders provide funds to the finance company that is subsequently loaned to customers; the customers' loans collateralize the lenders' loans to the finance company. This is because profit is made in the spread, or the difference between your cost of acquiring capital and profit from lending it out.
Any funding request should indicate how much you need, how you intend to use the money, and the terms of the loan or investment.
6. Document your marketing and sales management strategies. Your marketing strategy should explain how you plan to attract and communicate with both customers and lenders/depositors. It should also show how you plan to grow your company. The sales strategy defines how you will sell your product.
Promotional strategies include advertising, public relations and printed materials.
Business growth opportunities not only include building your staff, but also acquiring new businesses or beginning to offer different kinds of products.
The sales strategy should include information about the size of your sales force, procedures for sales calls and sales goals.
7. Include financial statements in your business plan. Reviewing the pro forma financial statements you created during your business planning, be sure that your projections are reasonable and conservative. You may also want to cautiously estimate performance over the next two years after that. Include a ratio analysis to document your understanding of financial trends over time and predict future financial performance.
Prospective financial data should provide monthly statements for the first year and annual statements for the next two years.
Standard financial ratios include Gross profit margin, ROE, Current ratio, Debt to Equity.
Ratio and trend analysis data helps you document whether you will be able to continue to serve your customers over time, how well you utilize your assets and manage your liabilities, and whether you have enough cash to meet your obligations.
Tip: Add graphs to your analysis to illustrate positive trends.
Part 4 Determining Your Business Structure.
1. Consider forming a Limited Liability Company. A Limited Liability Company (LLC) is similar to a corporation in that it protects its owners from personal liability for debts or actions incurred by the business. However, they have the tax advantages of a sole proprietorship or partnership. A corporation typically files taxes separately from the shareholders.
Be aware that corporations pay double federal income tax, meaning taxes are assessed when profit is earned, and then again when it is distributed to shareholders.
You should seek legal advice to determine the best structure for your business.
2. Name and register your business. Choose a name that represents your brand and is unique enough to obtain a website address or URL. When choosing a name, check with the U.S. Patent and Trademark Office to make sure you are not infringing on any trademarks. Also, check with you state to see if the name is already in use by another corporation.
You will have to register with your state as a corporation. The exact registration process varies by state and type of corporation you decide to form.
Since your business name is one of your most important assets, protect it by applying for trademark protection with the U.S. Patent and Trademark Office.
3. Obtain a require operational licenses and permits. Financial institutions acquire these from the state in which they operate. Consult with your State Business License Office to identify the specific license and permit you need. Each state has different requirements for licensing financial institutions. You will need to specify exactly what type of financial institution you are opening, such as an investment company or a licensed lender. You will then furnish the requisite documents and pay any fees.
Due to the incredibly complex and constantly-evolving nature of the financial services industry, it is advised that finance companies hire and retain expert legal counsel to guide them through these regulations.
Note: You will also need to comply with any permit requirements surrounding your office space, like public and workplace safety regulations and operating permits.
4. Learn about regulations. The two categories of financial regulations in the United States are safety-and-soundness regulation and compliance. Safety-and-soundness regulations protect creditors from losses arising from the insolvency of financial institutions. Compliance regulations aim to protect individuals from unfair dealings or crime from the financial institutions. Financial regulations are carried out by both federal and state agencies.
Federal financial regulation agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Securities and Exchange Commission (SEC).
State regulatory agencies may have additional requirements that are even more stringent than those set by the SEC.
With the help of your legal counsel, investigate reserve and initial funding requirements for your company. This will determine how much startup money you need.
5. Protect yourself from risk and liabilities with indemnity insurance. Indemnity insurance protects you and your employees should someone sue you. Financial institutions should purchase a specific kind of indemnity insurance called Errors and Omissions (E&O) insurance. This protects the financial company from claims made by clients for inadequate or negligent work. It is often required by government regulatory bodies. Remember, however, that staying in compliance with all regulatory requirements is still your responsibility.
Part 5 Setting Up Shop.
1. Obtain financing. You will need to finance your company according to your business plan, using a combination of equity and debt financing. Initial startup costs will be used for meeting reserve requirements and the building or rental of office spaces. From there, much of the company's operating capital will be lent out to customers.
Be aware of Federal and State laws regulating the private solicitation of investors. Adherence to securities laws regarding the information provided to potential investors and the qualifications of the investor will apply in most circumstances.
Sources of debt financing include loans from the government and commercial lending institutions. Money borrowed with debt financing must be paid back over a period of time, usually with interest.
The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, these loans can only be used for the purchase of equipment, not lent out to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan should the business default.
Finance companies face the problem of having to raise large amounts of initial funding to be successful. They also often have to deal with a slew of other challenges before they become profitable. Without accounting properly for issues like fraud, it's very easy for a finance company to go out of business.
Note: Investors may want to provide financing in exchange for equity in the company. This is called equity financing, and it makes the investors shareholders in the company. You don’t have to repay these investors, but you do have to share profits with them.
2. Choose your location. A finance company should make a positive impression on customers. Customers looking for a loan will want to do business in a place that projects a trustworthy and sound image. Take into account the reputation of the neighborhood or of a particular building and how it will appear to customers. Also consider how customers will reach you and the proximity of your competitors. If your target customers are small local businesses, for example, they may not want to drive to a remote location or deal with heavy city traffic to meet with you.
If you are not sure, contact your local planning agency to find out if your desired location is zoned for commercial use, especially if you plan to operate out of your home.
Leasing commercial office space is expensive. Consider your finances, not only what you can afford, but also other expenses such as renovations and property taxes.
In today's connected world, it's also possible to run a finance company online, without a location for physical interaction with customers. While you'll likely still need an office for your employees, not having a retail location can save you some regulatory hassle expense.
3. Hire and retain employees. Write effective job descriptions so employees and applicants understand their role in the company and what your expectations of them are. Compile a compensation package, including required and optional fringe benefits. Compose an employee handbook that communicates company policies, compensation, schedules and standards of conduct.
Perform pre-employment background checks to make informed decisions about whom you hire. Financial planners and advisors require a specific educational background and are subject to rigorous certification requirements. Consider obtaining credit reports to show how financially responsible a candidate is.
4. Pay your taxes. Obtain an Employee Identification Number (EIN) from the IRS. This is also known as your Federal Tax Identification Number. Determine your federal and state tax obligations. State tax obligations include income taxes and employment taxes. All states also require payment of workers' compensation insurance and unemployment insurance taxes, and some also require payment of disability insurance.
5. Create loan packages for your clients. Decide if you are going to offer revolving or fixed-amount types of credit. Think about your target customers and what kinds of loans they would need. Homeowners and individuals may seek mortgages, auto loans, student loans or personal loans. Entrepreneurs may seek small business loans. Consolidated loans may help customers who are struggling to manage their finances.
Recognize that your loan offerings, rates, and terms will need to be constantly reworked with the changing loan market. Some of these items may also be subject to various regulations, so consult your legal counsel before finalizing your offerings.
6. Market your new finance company. Target your marketing efforts towards your chosen niche of clients. Marketing includes networking and advertising, but there are also other ways of letting potential customers know you have set up shop. Become a familiar face in your local business community by attending and speaking at events sponsored by the local chamber of commerce. Publish communications such as a newsletter or e-zine. Participate in social networking on sites like Facebook, LinkedIn and Twitter.
Note: In order to become successful, you'll have to attract both depositors and loan customers, so be sure to offer deals on both ends. Without attracting depositor, you will have no capital to lend out to customers.
You’ve found the car of your dreams. Now what do you do? How do you get the money for it? When an individual decides to buy a new or used car, he or she often needs to finance part of or all of the vehicle’s price. Because cars are such a big purchase, many buyers can't provide cash down for the vehicle, so they choose to finance a car over a period of time. There are two financing routes you can choose to go down — either getting a direct or a dealer loan. Before you choose to finance your next vehicle, you should do your homework to ensure that you get the best deal.
Method 1 Doing Your Homework.
Find out how much you can afford up front. If you know the ballpark value of what you want to pay for a vehicle, and how much you can afford to pay in cash, you will know about how much you will need to finance.
Maximize your down payment. A smart way to finance a car is to get as much of a down payment as you can. The more you can pay at the beginning of a deal, the less you will have to pay in interest. Even if you have to temporarily sell some assets to buy the car outright, that can be a better deal than financing a major portion of the cost.
Know your credit score. Much of the financing offer for a car is based on your credit score. Those with good credit will get better interest rates and cheaper car financing offers. This is important no matter who you finance your vehicle through.
Find out your credit score either through the dealer or online at websites like www.annualcreditreport.com, www.freecreditscore.com, www.creditkarma.com, or www.myfico.com.
If your credit score is higher than 680, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the better bargaining position you will be in.
Compare loan rates online. There are many websites that compare deals at no cost. Additionally, it is a great way to get in contact with various companies.
Get the necessary materials together. Most lenders will want your name, social security number, date of birth, previous and current addresses, occupation, proof of income, and information on other outstanding debts.
Method 2 Getting a Direct Loan.
Contact certified lenders. Local and national banks, as well as credit unions can give you the terms and interest rates they are offering on used car loans over the phone and online. Shop around and find the best rate for you. You don't have to apply for financing through the dealer, though you certainly can. Oftentimes you can get a fairer deal when you figure out your financing first before you walk into the dealership. Apply for financing through a bank or an app that connects you to lenders.
Oftentimes, credit unions have the lowest interest rates, especially if you are a member. Check with your employer to see if they have any connections with local credit unions for you to take advantage of.
Many lenders offer 5 year loans on vehicles that are five years old at most. Older vehicles are often only eligible for 1 to 2 year loans. In many cases, the fear is that an older car will break down and then borrowers will default on their loans.
Additionally, lenders often impose mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically, they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer. In these cases, you’ll have to get a deal loan. See below.
Solicit rate quotes from several lenders. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans. This is because lenders are fearful of financing used vehicles.
Be as specific as possible with a lender. Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The more detail you can give the lender, the more firm your rate quote will be.
Talk to lenders about any fees or extra charges. Some lenders offer low interest rates and make back the money by tacking on additional fees and charges to a loan deal. You'll want to know about these, as well as any other specific loan agreement aspects like prepayment penalties, which can trigger fees if you pay the loan off early.
Get prequalified. Fill out the paperwork ahead of time. Many banks or lenders will pre-qualify you for a car loan based on your credit score, the type of car you plan on purchasing, and your driving history.
Ask the lender with the best rate offer for a pre-qualification letter. It should outline the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car. When you go to the dealer's lot, you can show them evidence pre-qualification from a reputable lender. This will expedite the car buying experience. It will also tell the car dealer you are ready to buy.
If you haven’t prequalified, you can get financing at the dealer's lot for a one-stop shopping experience, but having other lender alternatives helps you to get the best deal.
Method 3 Getting a Dealer Loan.
Get a loan through a new or used car dealer.
In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. In many cases, smaller dealerships work with third party lenders to finance your vehicle. Because they play the middleman, they pass off the costs to you. Therefore, you may want to apply for a direct loan first and cut out the dealership middleman.
In some cases, financing lenders like local banks and credit unions won’t take a chance on used cars. For used cars, most dealers will finance used cars they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
Bring leverage. Bring interest rates from direct loan lenders, even if you plan on financing with the dealer. Dealers are more likely to offer lower interest rates, if you show them that you know what other lenders are offering. Make sure you research competitive interest rates based on your credit score.
Offer a down payment in cash or trade equivalent to at least 10% of the vehicle's purchase price. The larger the down payment, the less money you will have to finance and the less interest you’ll have to pay on that loan.
Tips.
If you have a low credit score, consider asking someone with a high credit score to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
If your loan application gets rejected, don’t feel bad. Most likely, the lender doesn’t think you are able to pay back the loan on time. Reassess your budget and try again or try a different lender.
Warnings.
If you finance a used car, be prepared to pay for comprehensive insurance on the vehicle, which is more expensive than collision insurance commonly applied to used cars. Lenders require that you carry comprehensive insurance to protect their investment. Lenders often fear that if you damage the car, you will default on the loan, so they make you take out better insurance.
Be wary of dealers who advertise financing with "no credit check." Typically, these car lots sell high-mileage vehicles with inflated down payments and interest rates.
You’ve found the car of your dreams. Now what do you do? How do you get the money for it? When an individual decides to buy a new or used car, he or she often needs to finance part of or all of the vehicle’s price. Because cars are such a big purchase, many buyers can't provide cash down for the vehicle, so they choose to finance a car over a period of time. There are two financing routes you can choose to go down — either getting a direct or a dealer loan. Before you choose to finance your next vehicle, you should do your homework to ensure that you get the best deal.
Method 1 Doing Your Homework.
Find out how much you can afford up front. If you know the ballpark value of what you want to pay for a vehicle, and how much you can afford to pay in cash, you will know about how much you will need to finance.
Maximize your down payment. A smart way to finance a car is to get as much of a down payment as you can. The more you can pay at the beginning of a deal, the less you will have to pay in interest. Even if you have to temporarily sell some assets to buy the car outright, that can be a better deal than financing a major portion of the cost.
Know your credit score. Much of the financing offer for a car is based on your credit score. Those with good credit will get better interest rates and cheaper car financing offers. This is important no matter who you finance your vehicle through.
Find out your credit score either through the dealer or online at websites like www.annualcreditreport.com, www.freecreditscore.com, www.creditkarma.com, or www.myfico.com.
If your credit score is higher than 680, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the better bargaining position you will be in.
Compare loan rates online. There are many websites that compare deals at no cost. Additionally, it is a great way to get in contact with various companies.
Get the necessary materials together. Most lenders will want your name, social security number, date of birth, previous and current addresses, occupation, proof of income, and information on other outstanding debts.
Method 2 Getting a Direct Loan.
Contact certified lenders. Local and national banks, as well as credit unions can give you the terms and interest rates they are offering on used car loans over the phone and online. Shop around and find the best rate for you. You don't have to apply for financing through the dealer, though you certainly can. Oftentimes you can get a fairer deal when you figure out your financing first before you walk into the dealership. Apply for financing through a bank or an app that connects you to lenders.
Oftentimes, credit unions have the lowest interest rates, especially if you are a member. Check with your employer to see if they have any connections with local credit unions for you to take advantage of.
Many lenders offer 5 year loans on vehicles that are five years old at most. Older vehicles are often only eligible for 1 to 2 year loans. In many cases, the fear is that an older car will break down and then borrowers will default on their loans.
Additionally, lenders often impose mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically, they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer. In these cases, you’ll have to get a deal loan. See below.
Solicit rate quotes from several lenders. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans. This is because lenders are fearful of financing used vehicles.
Be as specific as possible with a lender. Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The more detail you can give the lender, the more firm your rate quote will be.
Talk to lenders about any fees or extra charges. Some lenders offer low interest rates and make back the money by tacking on additional fees and charges to a loan deal. You'll want to know about these, as well as any other specific loan agreement aspects like prepayment penalties, which can trigger fees if you pay the loan off early.
Get prequalified. Fill out the paperwork ahead of time. Many banks or lenders will pre-qualify you for a car loan based on your credit score, the type of car you plan on purchasing, and your driving history.
Ask the lender with the best rate offer for a pre-qualification letter. It should outline the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car. When you go to the dealer's lot, you can show them evidence pre-qualification from a reputable lender. This will expedite the car buying experience. It will also tell the car dealer you are ready to buy.
If you haven’t prequalified, you can get financing at the dealer's lot for a one-stop shopping experience, but having other lender alternatives helps you to get the best deal.
Method 3 Getting a Dealer Loan.
Get a loan through a new or used car dealer.
In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. In many cases, smaller dealerships work with third party lenders to finance your vehicle. Because they play the middleman, they pass off the costs to you. Therefore, you may want to apply for a direct loan first and cut out the dealership middleman.
In some cases, financing lenders like local banks and credit unions won’t take a chance on used cars. For used cars, most dealers will finance used cars they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
Bring leverage. Bring interest rates from direct loan lenders, even if you plan on financing with the dealer. Dealers are more likely to offer lower interest rates, if you show them that you know what other lenders are offering. Make sure you research competitive interest rates based on your credit score.
Offer a down payment in cash or trade equivalent to at least 10% of the vehicle's purchase price. The larger the down payment, the less money you will have to finance and the less interest you’ll have to pay on that loan.
Tips.
If you have a low credit score, consider asking someone with a high credit score to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
If your loan application gets rejected, don’t feel bad. Most likely, the lender doesn’t think you are able to pay back the loan on time. Reassess your budget and try again or try a different lender.
Warnings.
If you finance a used car, be prepared to pay for comprehensive insurance on the vehicle, which is more expensive than collision insurance commonly applied to used cars. Lenders require that you carry comprehensive insurance to protect their investment. Lenders often fear that if you damage the car, you will default on the loan, so they make you take out better insurance.
Be wary of dealers who advertise financing with "no credit check." Typically, these car lots sell high-mileage vehicles with inflated down payments and interest rates.
