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Chapter 18

This document provides an overview of different types of consumer loans including consumer loans, residential loans, nonresidential loans, credit cards, and real estate lending. It discusses the characteristics and evaluation of consumer loan applications, including factors like income, employment history, and credit scores. Laws and regulations around consumer loans including disclosure rules and antidiscrimination laws are also summarized.

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Alex Gu
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71 views

Chapter 18

This document provides an overview of different types of consumer loans including consumer loans, residential loans, nonresidential loans, credit cards, and real estate lending. It discusses the characteristics and evaluation of consumer loan applications, including factors like income, employment history, and credit scores. Laws and regulations around consumer loans including disclosure rules and antidiscrimination laws are also summarized.

Uploaded by

Alex Gu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 18

Consumer Loans, Credit Cards, and Real


Estate Lending
▫ Consumer debt has become one of the fastest growing forms of
▫ borrowing money including both mortgage and nonmortgage
consumer debt
▫ Consumer credit is often among the most profitable services a
lender can offer
▫ Types of Loans Granted to Individuals and Families :
1- Consumer loans are classified by
▫ Purpose – what the borrowed funds will be used for
▫ Type – whether the borrower must repay in installments or repay
in one lump sum
2- Residential Loans
• Credit to finance the purchase of a home or fund improvements on a
private residence
• Usually a long-term loan, typically bearing a term of 15 to 30 years
• Secured by the property itself
• 3- Nonresidential Loans
a- Installment Loans : Short-term to medium-term loans, repayable
in two or more consecutive payments (usually monthly or
quarterly)
b- Noninstallment Loans
- Short-term loans individuals and families draw upon for immediate
cash needs that are repayable in a lump sum
- May be for relatively small amounts and include charge accounts that
often require payment in 30 days or less
- May also be made for a short period (usually six months or less) to
wealthier individuals and can be quite large
4- New Credit Card Regulations
New credit card regulations appeared early in 2003 to slow the
expansion of card offers to customers with low credit ratings.
Characteristics of Consumer Loans
• Lenders regard consumer loans as profitable credits with “sticky” interest
rates.
-Contract interest rates often do not change readily with market conditions as
do interest rates on most business loans
• Consumer loans are usually priced so high that market interest rates on
borrowed funds and default rates on the loans themselves would have to
rise substantially
Evaluating a Consumer Loan Application
• Character and Purpose
▫ -Key factors in analyzing any consumer loan application are the
character of the borrower and the borrower’s ability to pay
▫ Consumer lenders nearly always check with one or more credit
bureaus concerning the customer’s credit history
▫ In the case of a borrower without a credit record or with a poor
track record of repaying loans, a cosigner may be requested to
support repayment
▫ Many lenders regard a cosigner as primarily a psychological device
to encourage repayment of the loan
• Other Important Items For Lenders
1- Income Levels
2- Deposit Balances
3- Employment and Residential Stability
4- Pyramiding of Debt
Credit Scoring Consumer Loan Application (continued)
• The FICO System
FICO score are based on five different types of information (most
important to least important):
1- The borrower’s payment history
2- The amount of money owed
3- The length of a prospective borrower’s credit history
4- The nature of new credit being requested
5- The types of credit that the borrower has already used
Laws and Regulations Applying to Consumer Loans (continued)
1. Disclosure rules
▫ Mandate telling the consumer about the cost and other terms
of a loan or lease agreement
2. Antidiscrimination laws
▫ Prevent categorizing loan customers according to their age,
sex, race, or other irrelevant factors and denying credit to
anyone solely because of membership in one or more of these
groups
Real Estate Loans not include the final exam
Pricing Consumer and Real Estate Loans: Determining the Rate of Interest and
Other Loan Terms
A financial institution prices every consumer loan by setting an interest
rate, maturity, and terms of repayment
• The Interest Rate Attached to Nonresidential Consumer Loans
▫ The Cost-Plus Model
• Annual Percentage Rate (APR)
• Simple Interest Rate
• The Discount Rate Method
• The Add-On Loan Rate Method

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