Finance deals
Though the words finance deals import all varieties of finance transactions, in common parlance, these words imply the need for substantial funding for purchasing an asset. Therefore, there is a seller of an asset, a buyer of the asset, and a financier or lender, in the picture.
Types of finance deals include:
- Real estate finance
- Business acquisition finance
- Car finance
Though normally borrower can obtain finance for purchasing residential or commercial properties from banks, and financial institutions, there are some properties that these lenders wouldnt be willing to finance. Alternatively, the borrower may not have adequate track record of financial discipline to get such loans from banks and financial institutions or is not eligible for these loans because of inadequate income. This is where creative finance deals come in, offering some advantage to the buyer, simultaneously safeguarding the interests of the lender. Creative finance deals have features such as a moratorium, short-term ballooning and variable interest rates. For availing such finance, the borrower mortgages the real estate property being acquired with the finance deal.
When large businesses are being bought, substantial consideration is to be paid to the seller. Not all of this finance can be paid at one go. Therefore, the business doing the acquisition approaches a bank for such finance. Since the amounts involved are substantial, bankers form a syndicate, in which different banks join in offering finance on different terms and conditions. A lead banker is appointed to negotiate the finance deal, on behalf of the other banks. The assets of the business being acquired become the security for this type of finance.
Car finance or vehicle finance is another frequently used type of finance. The buyer takes a vehicle, which is hypothecated to the lender, for the value lent by the lender plus interest rates. The finance taken by the borrower is repayable along with interest in monthly installments for an agreed term.
Examples of a common finance deals are given below:
Car finance. The buyer likes a car of $1,000. The vehicle finance company agrees to grant $800 as loan for a period of 3 years, at an interest rate of 10 percent. The installment payable is calculated as $28.89. This is calculated in the following manner:
Interest = 800 x 10/100 x 3 = 240
Principal + interest = 240+1000= 1240 Installment = 1240/36 months = 28.89
Private lenders make some variations to this type of finance, which the buyer must watch out for. These lenders offer finance of $800, but ask the buyer to make a down payment of 3 installments. Effectively, this increases the rate of interest paid by the buyer, as the amount received as finance is less than 800 dollars, but the interest is calculated on 800 dollars.
Now compare with home finance taking same amount of finance for same period, and at the same rate of interest. The borrower is informed that the interest is calculated on fixed rate of interest.
The installment comes down to 25.8 dollars. This is because in home finance, the interest is calculated on the balance amount outstanding at the end of every month.
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