When comparing the strength of finance companies, one usually consults the credit rating of each. If you need a comprehensive view of the credit rating system, a class in finance is a great way to start.
The rating of a finance company reflects its health and reputation. One can find the rating on the websites of either of the two two established and well-regarded American credit ratings agencies.
The ratings systems are somewhat flawed; this is due, among other problems, to a lag time between finance company developments and the issuance of the reports. Thus, it is a good idea to do a substantial amount of independent research. There should be an analysis of:
- Franchise strength
- Earnings power
- Risk profile, asset quality, and risk management processes
- Capital structure and adequacy
Some general guidelines:
- Don’t skimp on the research. Too many investors leap before they look and wind up losing in their haste to make a quick buck. Instead, exercise patience and keep shopping until you are certain you have found the right institution for you.
- Focus on your goals, not the goals of the finance company. Don’t allow yourself to be talked into a plan of action by thinking of yourself as one of the “little people”.
- Always remember that you are the boss. The finance company is merely an advisor and should stay in that role. After all, it is your money that is at stake.
- Always remember: caveat emptor; think critically.
- Be realistic about how much debt you are able to carry. Profligacy and irrational exuberance is what brought about much of the current financial trouble the world is experiencing now. Don’t contribute to further personal and systemic dysfunction by reproducing same pattern.
- Read all contracts and solicit legal advice if they are not completely clear. The finance company should encourage this practice.
- Maintain sobriety. Don’t get greedy and acquire more than you are ready for. Sleeping on major decisions and thinking them over extensively is a prudent course of action.
The business press contains reliable information about finance companies. Some standard publications are the Wall Street Journal, Forbes, Fortune, and Investors Business Daily. Make a practice of reading them on a regular basis and gain a familiarity with business and finance vocabulary. It’s also a good idea to pick up a few finance classes that are designed especially for small investors. Comparing finance companies shouldn’t be overly opaque. Likewise, the finance company shouldn’t be so byzantine as to resist your scrutiny. Over a period of years, assiduous attention to detail with analysis of larger patterns coupled with the above instructions should allow you to amass a tidy sum and provide you with a substantial nest egg.