Week 10- Homework Submission

Week 10 - Homework Submission

Business Loans and Financing Costs

The role of the Business Loans and Financing costs is important for any business transaction. According to the Federal Reserve data, finance companies are responsible for 21.7% of all consumer debt in the United States. Finance companies, as defined by the Fed, are distinct as lenders from depository institutions, commercial banks, savings institutions, credit unions, nonfinancial businesses, and the federal government. As a result, the finance company category, which includes all “personal cash loans”, includes most of the institutions that are responsible for high-cost loans, including payday loans, car-title loans, and tax-rebate anticipation loans. Among consumer credit products, high-cost loans' identifying characteristic is that, relative to conventional products like credit cards and installment loans, the finance charges paid by consumers in order to borrow funds are substantially higher. Finance charges can be comprised of interest charges or fees, and often both (Berger & Udell, 1995).

There are some loans that involves high interest costs and are usually used by the consumers to various expenses that includes purchase of car, household expenses and many other costs. Such loans may cause hardship to the consumer by imposing large accumulated costs through repeated use. In other words, these loans may be so expensive that using them effectively drains a consumer's wealth. If this drain is substantial enough, the household may experience catastrophic life events, such as credit defaults or bankruptcy, indicating that high-cost loans are associated with financial hardship. This is a feature of the loan which is considered a negative trait for the consumers (Kaplan & Strömberg, 2000).

As the fastest growing segment of the high-cost loan market, the most commonly studied of the se products is the payday loan. A payday loan, sometimes referred to as a cash-advance loan, is a form of credit that features small loan amounts, high interest rates, and short terms, compared to alternatives offered at banks. Traditionally, though not in all instances, payday loan borrowers receive immediate funds in exchange for a personal check, in the amount of the loan plus fees that is postdated for the borrower's next scheduled payday. The borrower is expected to repay the loan in person on the payment date, but if this does not happen, the lender may choose to cash the check provided.

In the case of companies, the debt financing is a common tool for meeting the financial needs of the business. In the Balance Sheet, the column of Debt Financing is also included. The Debt Financing has headings such as Current and Long term Liabilities. These are some of the common terms related to debt financing. The Current Liabilities includes those debts that are incurred within a one year time period. Similarly, the Long term Liabilities include those debts which range from period more than one year. However, the company has strong dependence on the debt that covers the Bank Loans, Bonds and Debentures. There is one element related to the liabilities is that the company ...