What does financing mean?

What does financing mean
What does financing mean

Financing is a process of giving a loan to the customers on an item that they purchase. When you buy a product on credit, it makes use of seller financing. You do not have to pay for the item on the spot, but you are billed periodically by the seller for a portion of the cost, plus interest charges. Consumers commonly use financing when purchasing big-ticket items like cars, jewelry, major appliances, and furniture.

The charge on Financing

An important point to note is that when retailers or dealers advertise financing, the interest rate that they quote is not necessarily the one that applies to you. Sometimes, the rate you actually end up paying is affected by your geographical location, credit history, the term of a loan and the condition of the item being purchased. Generally, new items are less expensive to finance (i.e., lower interest rates) than used items.

Advantages and Disadvantages of Financing

There are also some advantages and disadvantages to the seller’s financing program. The advantages are that it’s often fast, convenient and competitive, and if you do not meet the rigid requirements of traditional lenders, there is a good chance that you can obtain financing from a seller. The disadvantage is associated with seller financing are that there are sometimes higher interest rates and down payment requirements than those at traditional lending institutions.

Financing and Foreclosure

When a customer gets something on financing he/ she has to pay to the seller on a fixed time. If a customer fails to pay back the loan, the lender can take the home/ car/ bike, anything he/she got from the lender through a legal process known as foreclosure.

Financing Example

Suppose, John Dee wants to buy a car to go to the office. The car dealer is selling the car for $10000. However, John Dee only has $4000 saved for the car. Mr. John Dee goes to a finance company and completes an application to borrow $6,000 so he’ll have enough money to purchase the car.

Once Mr. John Dee completes the application, the finance company reviews his request. They look at his credit report to ensure that what Mr. John Dee has borrowed from in the past? Did he repay the loans he had in the past? Did he make his payments on time? etc. After getting satisfactory conditions, the finance company lends him the additional funds with some terms and conditions and a pretty interest rate. Now, Mr. John Dee can purchase the car.

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