Definition: Financing

The term "financing" is used whenever one's own monetary resources, equity, are not sufficient to immediately pay for a planned purchase in full. In these cases, it can make sense to take out a loan or credit with a certain term to cover the costs of the planned purchase. Financing therefore allows for a quick acquisition.

This purchase can be a new car, a property purchase, the construction of a house, or even a vacation. A loan can be granted by various lending institutions and, especially for larger amounts, secured by collateral or guarantees. Repayment is usually made in monthly installments; in addition, the lender charges interest, which is added by the creditor, for example a bank, depending on creditworthiness and the economic situation.

Especially in the case of companies, two types of financing are distinguished: external financing and internal financing. In each case there is equity financing and debt financing.

Equity financing in external financing for companies can, for example, be implemented by taking on new partners. Debt financing here is solved by a bank loan. In internal financing, for example, the retention of profits is used for equity financing. For debt financing in internal financing, provisions are used for financing.

Financing valuable purchases

If self-financing is not desired, capital can be obtained in various ways. Financing via a loan represents capital obtained from outside; for companies, additional funds can also come from an equity investment or provision financing.

Consumer loans and credits are usually provided by various lenders and must be repaid within a certain term. These can include bank loans, private loans, or foreign loans. To finance purchases, the lender will check, among other things, the purpose of the funds and whether the income is sufficient to pay the monthly installments, which represent the repayment of the capital including interest.

Comparing financing options

Whether it's financing for a new car, special personal purchases or a property - it is important to compare the terms. High interest rates and fees can lead to significantly higher costs in the case of long-term financing.

The borrower should take the time to carefully compare the offers from lenders when financing purchases in order to find the best financing for them.

For example, when buying a new car you should compare different dealers and their financing models. The same applies to banks and credit institutions.

Financing provides the desired funds quickly and easily and enables the use of planned purchases immediately, while repayment takes place in agreed, manageable installments. So if self-financing is not possible, there is always the option to use external financing.

A heavily advertised form of financing is the 0% financing. This is an installment loan with a fixed term and fixed installment amount. Zero-percent financing sounds very attractive, but you should still be careful that different installment amounts do not add up unexpectedly. Therefore, exercise caution with zero-percent financing.