Chapter 4.4, Problem 4R

To determine

The reason that the consumer finance agencies are allowed to charge higher rates of interest from the consumers as compared to other lending institutions of credit.

Answer to Problem 4R

High rate of interest is charged by the finance agencies as compared to the lending institutions (banks) because the finance agencies easily provide huge amounts of loans to the businesses for which the banks won’t approve.

Explanation of Solution

The consumer finance agencies do not accept deposits as the other lending institutions such as banks do. They just advance the loans to the consumers on some security.

Such finance companies charge higher rates of interest from the consumers as compared to banks because it is easy for the consumers to take large amounts of loan from such agencies easily which they cannot get from the banks. Moreover the small businesses are benefited because they can easily get huge amounts of loans from such agencies for which they won’t get facilitated from the commercial banks.

Economics Concept Introduction

Introduction:

Consumer finance agencies are those which provide the facility of credit in the form of loans to the consumers for the purchase of consumer goods or to the traders by taking the time-sales contracts.

Majorly there are three types of finance companies:

1.      Business

2.      Consumer

3.      Sales

The lending institutions majorly as the commercial bank can be defined as the institution which provides the services of accepting deposits and advancing loans to the people.