6
6.1
6.2
6.3
6.4
Slide 1
BANK LOANS
Consumer Loans
Granting and Analyzing Credit
Cost of Credit
Credit and the Law
© South-Western Publishing
Lesson 6.1
CONSUMER LOANS
GOALS
Define major terms associated with
consumer lending
Explain the difference between installment
loans and open-end loans
Slide 2
© South-Western Publishing
INSTALLMENT LOANS
Personal loans
Automobile loans
Home equity loans
Education loans
Slide 3
© South-Western Publishing
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.
Slide 4
© South-Western Publishing
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.
Slide 5
© South-Western Publishing
OPEN-END LOANS
Credit cards
Lines of credit
Slide 6
© South-Western Publishing
Lesson 6.2
GRANTING AND
ANALYZING CREDIT
GOALS
List steps in the credit-approval process
Identify major criteria in a person’s credit
rating
Slide 7
© South-Western Publishing
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.
Slide 8
© South-Western Publishing
CREDIT-APPROVAL PROCESS
Application
Documentation
Processing
Underwriting
Collateral
Capacity
Credit reputation
Closing
Funding
Slide 9
© South-Western Publishing
ANALYZING CREDIT
Consumer reporting agencies
Credit-scoring systems
Slide 10
© South-Western Publishing
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
Slide 11
© South-Western Publishing
CREDIT REPORTS INCLUDE
Personal data
Accounts history
Delinquent accounts
Public records
Inquiries
Slide 12
© South-Western Publishing
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.
Slide 13
© South-Western Publishing
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.
Slide 14
© South-Western Publishing
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)
Slide 15
© South-Western Publishing
Lesson 6.3
COST OF CREDIT
GOALS
Identify key factors in the cost of credit
Explain the impact of negative credit
ratings on consumers
Slide 16
© South-Western Publishing
WHAT CREDIT COSTS
Annual percentage rate
Minimum payments
Term
Slide 17
© South-Western Publishing
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
Slide 18
© South-Western Publishing
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.
Slide 19
© South-Western Publishing
TREND TOWARD LOWER MINIMUM PAYMENTS
Increases bank profits
Contributes to greater consumer debt
Slide 20
© South-Western Publishing
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
Slide 21
© South-Western Publishing
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
Slide 22
© South-Western Publishing
THE IMPACT OF CREDIT
Overextension
The role of banks
Credit counseling
Slide 23
© South-Western Publishing
Lesson 6.4
CREDIT AND THE LAW
GOALS
Explain the purpose of consumer
protection laws in lending
Identify important laws associated with
consumer loans
Slide 24
© South-Western Publishing
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
Slide 25
Schedule of payments
Prepayment policies
Late payment policies
Security interest
© South-Western Publishing
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.
Slide 26
© South-Western Publishing
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.
Slide 27
© South-Western Publishing
FAIR DEBT COLLECTION PRACTICES ACT
The Fair Debt Collection Practices Act (FDCPA)
protects consumers form unfair collection
techniques.
Slide 28
© South-Western Publishing
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
Slide 29
© South-Western Publishing
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
Slide 30
© South-Western Publishing
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
Slide 31
© South-Western Publishing
CREDIT REPAIR ORGANIZATION ACT
Prohibits credit repair companies from misleading
consumers about their services and costs
Requires agreements to be in writing
Slide 32
© South-Western Publishing
GRAMM-LEACH-BLILEY ACT
Compels banks and other financial institutions to
protect the privacy of consumers
Slide 33
© South-Western Publishing
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.
Slide 34
© South-Western Publishing