Final answer:
Financial institutions, including finance companies, commercial banks, savings and loan associations, savings banks, and credit unions, offer various services and facilitate economic activities by serving as intermediaries between savers and borrowers.
Step-by-step explanation:
Different types of financial institutions play unique roles within the economy, serving both savers and borrowers. The function of these institutions significantly affects households and businesses by facilitating capital formation, affecting levels of investment due to interest rates, and managing risk allocation.
Types of Financial Institutions:
- Finance Company: A non-depository institution that specializes in loaning money to consumers and businesses, often for the purchase of big-ticket items such as cars or for debt consolidation.
- Commercial Banks: These depository institutions offer a wide range of services, including checking and savings accounts, loans, and sometimes investment services. They make profits primarily through interest rates on loans and fees for services.
- Saving and Loan Associations: Also known as thrifts, these specialize in savings deposit accounts and real estate financing. Historically, they were limited by law in the interest they could pay on deposits and were geared towards housing-related loans.
- Savings Banks: Similar to savings and loan associations, they primarily focus on savings accounts and residential mortgage loans but may also offer checking accounts and other services.
- Credit Unions: Member-owned financial cooperatives that are generally non-profit. They provide similar banking services to commercial banks but are typically more community-oriented and offer higher interest rates on deposits.
These institutions collectively promote saving among individuals and provide the necessary funds for borrowers, aiding in economic stability and growth.