Name_________________________
FINANCE
CH. 6- Bank Loans and Credit
6.1 CONSUMER LOANS
Define:
Installment loan- Loan with fixed payments, fixed rate & length of time.
Examples:
Car loan, Mortgage (30 year fixed-Traditional)
Secured loan- Loan with collateral as the security - the bank will have a lien on the
property (car, house)
Collateral- The item that secures the loan (car, house)
Lien-
The lender (or bank) has legal ownership of the property
Unsecured loan- The loan is only backed by the borrower’s credit (no collateral)
Example: a $5000 line of credit with a bank
Open-ended loan- a loan that is flexible and does not have a fixed payment or time
frame- can be used over and over. (Example: a line of credit or a credit card).
Grace period- an extended time frame in which you can make a payment and avoid
late charges.
Fixed vs. Variable Rates
A fixed rate does not change regardless of changes in other interest rates.
A variable rate will adjust depending on economic interest rates
Example: A credit card with a rate of Prime +3
If the prime rate goes up (due to changes in Discount and Fed rate) so will the credit
card rate.
1A
6.2 GRANTING AND ANALYZING CREDIT
Define:
Risk Management- For bankers it’s the practice of minimizing financial loss through
effective policies.
6 Steps in the Credit- Approval Process
1. Application
2. Documentation
3. Processing
4. Underwriting
5. Closing
6. Funding
Subprime rates- Higher rates charged to those customers with a high risk (poor
credit)
Consumer reporting agency (CRA)- Companies that keeps record of consumer
payment history and sells this information to banks.
There are 3 of them: 1) Equifax 2) Experian 3) TransUnion
(list 5 areas of information that is listed on your credit reports)
1. Personal Data
2. Accounts History
3. Delinquent Accounts
4. Public Records
5. Inquiries
Credit scoring system- an efficient and unbiased method of evaluating credit- an
actual numeric score.
FICO score- a 3 digit credit scoring system most commonly used by financial
institutions in determining a person’s credit worthiness.
(list 5 areas of scoring): 1. Payment History (35%)
2. Amounts owed (30%)
3. Length of credit history (15%)
4. New credit (10%)
5. Types of credit (10%)
1B
6.3 COST OF CREDIT
Define or Explain:
APR- Annual Percentage Rate- amount of interest charged on the loan principal for
a year
Finance Charges- The total amount of charges the bank will charge for the loan
(compounded interest and fees)
Minimum Payments- Used in credit cards- usually 2-5% of the unpaid balance that’s
due each month.
Term- for installment loans, the length of the loan (months,years)
Overextension- taking on more debt than you can afford, when expenses are greater
than income.
Predatory Lending- lending credit to those with poor credit but increasing the
interest rate beyond a reasonable amount.
Credit Counseling- agencies that help people manage or consolidate their credit
Look at the chart on page 161, BANKING MATH CONNECTION
Answer the following question:
Your credit card balance is $2500 and your minimum payment is 2 %.
The APR is 18 percent.
What portion of a credit card payment goes toward the principal and what is toward
the interest?
FORMULA: Rate / 360 X 30 X Balance = Interest
$2500 x .02 = $50 minimum payment
.015 / 360 x 30 x $2,500 = $31.25 interest
$50 -$31.25= $18.75 toward reducing the balance
THE LONGER THE TERM THE GREATER THE TOTAL FINANCE CHARGES
Loan amount: $6,000
Creditor A
Creditor B
Creditor C
APR
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
6.4 Credit and the Law
Define or Explain:
THE 4 CONSUMER PROTECTION LAWS (FOUNDATION)
Truth in Lending Act (TILA)- Banks must disclose (explain) all fees associated with
taking out a loan.
Equal Credit Opportunity Act- prohibits the use of race, color, religion, age, etc to
discriminate when lending money
Fair Credit Reporting Act- to give individuals the right to know what is reported
from the credit bureaus.
Fair Debt Collection Practices Act- protects customers from unfair collection
techniques. Customers must be notified in advance before collection.
OTHER CONSUMER LAWS:
Fair Credit Billing Act- Fair practices for resolving billing disputes
Fair Credit and Charge Card Disclosure Act- credit card companies must disclose all
fees.
Home Equity Loan Consumer Protection Act- banks must disclose all fees related to
open ended loans secured by real estate.
Credit Repair Organization Act- Credit repair companies must disclose all fees and
requirements.
Gramm-Leach-Bliley Act- Compels banks to protect the privacy of consumers.
Credit information and personal information cannot be disclosed unless necessary.
2B