Transcript Chapter 6 BANK LOANS - Barren County School District

6
6.1
6.2
6.3
6.4
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BANK LOANS
Consumer Loans
Granting and Analyzing Credit
Cost of Credit
Credit and the Law
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Lesson 6.1
CONSUMER LOANS
GOALS
Define major terms associated with
consumer lending
Explain the difference between installment
loans and open-end loans
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INSTALLMENT LOANS
Personal loans
Automobile loans
Home equity loans
Education loans
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SECURED AND UNSECURED LOANS
A secured loan is one in which some item of
value backs the loan in case the borrower
defaults on the loan.
The item that secures the loan is called collateral.
A lien is a legal claim to property to secure a debt.
An unsecured loan is a loan backed only by the
reputation and creditworthiness of the borrower.
Unsecured loans are sometimes called signature
loans.
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LENDING TERMINOLOGY
Principal is the amount borrowed.
Interest is the amount you pay to use the principal.
Fees are other charges for the loan.
The finance charge is the total dollar amount to be
paid for the loan.
Total payments is the total amount a consumer
must repay.
Payment is the amount the borrower repays each
specified period.
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OPEN-END LOANS
Credit cards
Lines of credit
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Lesson 6.2
GRANTING AND
ANALYZING CREDIT
GOALS
List steps in the credit-approval process
Identify major criteria in a person’s credit
rating
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RISK MANAGEMENT
Risk management for bankers is the practice of
minimizing financial loss through effective policies.
Banks face risks in operations, credit, liquidity,
legal and regulatory compliance, and even
marketing matters.
Risk management policies include consideration of
the bank’s overall financial position, reserve
requirements, cash flow, and ratio analyses of
liabilities and assets.
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CREDIT-APPROVAL PROCESS
Application
Documentation
Processing
Underwriting
Collateral
Capacity
Credit reputation
Closing
Funding
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ANALYZING CREDIT
Consumer reporting agencies
Credit-scoring systems
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CONSUMER REPORTING AGENCIES
 A consumer reporting agency (CRA) is a company that
compiles and keeps records on consumer payment
habits and sells these reports to banks and other
companies to use for evaluation creditworthiness.
 Consumer reporting agencies are sometimes called
credit bureaus.
 The three largest CRAs
 Equifax
 Experian (formerly TRW)
 TransUnion
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CREDIT REPORTS INCLUDE
Personal data
Accounts history
Delinquent accounts
Public records
Inquiries
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CREDIT-SCORING SYSTEMS
A credit-scoring system can provide an efficient
and unbiased method of evaluating credit.
These scores place a numerical value on the
performance or status of an applicant in various
categories.
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FICO
The FICO credit-scoring system developed by
Fair, Isaac and Company, Inc. has become the
dominant credit-scoring system.
The FICO score is a three-digit number that
credit granters can use in making a loan
approval decision.
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FICO CRITERIA
Payment history (approximately 35 percent)
Amounts owed (approximately 30 percent)
Length of credit history (approximately 15 percent)
New credit (approximately 10 percent)
Types of credit (approximately 10 percent)
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Lesson 6.3
COST OF CREDIT
GOALS
Identify key factors in the cost of credit
Explain the impact of negative credit
ratings on consumers
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WHAT CREDIT COSTS
Annual percentage rate
Minimum payments
Term
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REVIEWING APR AND FINANCE CHARGE
The APR is a key aspect of comparing credit costs.
Sum-of-digits method
Previous balance method
Adjusted balance method
Average daily balance method
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MINIMUM PAYMENTS
Most credit cards require a minimum payment
every month.
Minimum payments are usually 2 to 5 percent of
the unpaid balance.
Paying the minimum payment keeps the account
in good standing, but it does not reduce the
principal much.
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TREND TOWARD LOWER MINIMUM PAYMENTS
Increases bank profits
Contributes to greater consumer debt
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TERM
For installment loans, length of term also affects
the total finance charge.
Repaying the loan over a longer period
reduces the monthly payment
increases the total payment for the loan
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COMPARING LOANS
Loan amount: $6,000
Creditor A
Creditor B
Creditor C
14%
14%
15%
Length of Loan
3 years
4 years
4 years
Monthly Payment
$205.07
$163.96
$166.98
Total Finance Charge
$1,382.52
$1,870.08
$2,015.04
Total Payments
$7,382.52
$7,870.08
$8,015.04
APR
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THE IMPACT OF CREDIT
Overextension
The role of banks
Credit counseling
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Lesson 6.4
CREDIT AND THE LAW
GOALS
Explain the purpose of consumer
protection laws in lending
Identify important laws associated with
consumer loans
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TRUTH IN LENDING
The Truth in Lending Act (TILA), Title I of the
Consumer Credit Protection Act of 1968
guarantees that all information about costs of a
loan is provided in writing to consumers.
Items that must be disclosed include the following:
Total sales price
Amount financed
Annual percentage rate
Variable rate information
Total payments
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Schedule of payments
Prepayment policies
Late payment policies
Security interest
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EQUAL CREDIT OPPORTUNITY ACT
The Equal Credit Opportunity Act (ECOA) prohibits
the use of race, color, religion, national origin,
marital status, age, receipt of public assistance, or
exercise of any consumer right against a lender as
a factor in determining creditworthiness.
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FAIR CREDIT REPORTING ACT
The Fair Credit Reporting Act (FCRA) aims to
protect the information that credit bureaus, medical
information companies, and tenant screening
services may collect.
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FAIR DEBT COLLECTION PRACTICES ACT
The Fair Debt Collection Practices Act (FDCPA)
protects consumers form unfair collection
techniques.
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FAIR CREDIT BILLING ACT
Is an amendment of TILA
Specifies fair procedures for resolving billing
disputes
Prevents creditors from taking adverse action
until the dispute is resolved
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FAIR CREDIT AND CHARGE CARD DISCLOSURE ACT
Is an amendment of TILA
Requires credit and charge card issuers to
provide information about open-end credit in
direct mail or telephone solicitations
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HOME EQUITY LOAN CONSUMER PROTECTION ACT
Is an amendment of TILA
Requires lenders to make appropriate
disclosures about open-end loans that are
secured by homes
Places limitations on such plans
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CREDIT REPAIR ORGANIZATION ACT
Prohibits credit repair companies from misleading
consumers about their services and costs
Requires agreements to be in writing
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GRAMM-LEACH-BLILEY ACT
Compels banks and other financial institutions to
protect the privacy of consumers
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COMPLIANCE
Authority for enforcing consumer protection acts
varies with the individual laws and the
government agency associated with it.
Federal statutes are enforced by
Federal Reserve
Federal Deposit Insurance Corporation (FDIC)
Federal Trade Commission (FTC)
Courts
Examiners conduct audits to test compliance.
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