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Loans Presented by S. Cox. Lending. Objectives. Describe the different types of loans Explain the types of financing assistance provided to businesses. Loan Characteristics. Loan – money temporarily transferred to a borrower in exchange for repayment and interest

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loans presented by s cox
Loans

Presented by S. Cox

Lending

objectives
Objectives
  • Describe the different types of loans
  • Explain the types of financing assistance provided to businesses
loan characteristics
Loan Characteristics
  • Loan – money temporarily transferred to a borrower in exchange for repayment and interest
  • Principal – the amount that a bank loans a customer
  • When banks loan money they expect the customer to repay the principal and pay an additional amount…interest
loan characteristics1
Loan Characteristics
  • Loans benefit the entire community…
    • When someone borrows money to buy a car, the purchase provides income for the dealership, the gas station and eventually a car repair shop
    • When a restaurant borrows money to buy a new kitchen and redecorate, the purchase provides income for employees, the equipment manufacturers, the interior designers, and the workers who install the new items
loan characteristics2
Loan Characteristics
  • Loan policy – keeps balance between the need to make money with the risk involved
    • Portfolio mix – selecting loans from different sectors
    • Rate of interest – interest earned on loans relative to collection costs for the loans
    • Risk diversification – balance between safe and risky loans
loan characteristics3
Loan Characteristics
  • Loan policy is developed by the institutions loan committee…
    • Reviews loan policy on an ongoing basis
    • Explores the development of new loan products
    • Looks for trends that will affect profitability or exposure to risk
    • Makes suggestions for changes to the policy, which usually takes place once a year
loan characteristics4
Loan Characteristics
  • First characteristic – who borrows the money
    • Consumer loans – individual borrowers
    • Commercial loans – when a company borrows money
      • Short term – usually paid within a year
loan characteristics6
Loan Characteristics
  • Second characteristic – repayment of the loan
    • Open-ended loan – does not have to be paid in full by a specific date, but regular payments must be made…credit card
    • Closed-end loan – must be paid in full on a specific date
      • Installment loan – loan for a large amount (house or car) that is repaid in small amounts over a specific period of time
loan characteristics7
Loan Characteristics
  • Third characteristic – secured or unsecured
    • Secured loan – loan is backed by the borrower’s property…collateral
      • The bank has the right to take the collateral if the borrower cannot repay the loan
    • Unsecured loan – less safe for the bank because it’s not back by collateral…only the borrowers promise to pay
      • Also known as a signature loan because you promise to repay the loan with your signature
financial assistance to businesses
Financial Assistance to Businesses
  • Many organizations and agencies exist to provide financial assistance and support to businesses
    • Small Business Administration - Created in 1953 to help Americans start and grow businesses
    • Export-Import of the United States – created in 1934 to help businesses export American goods and services to foreign countries
financial assistance to businesses1
Financial Assistance to Businesses
  • Farm Service Agency – provides financial and logistical support to commercial farms and is part of the US Department of Agriculture
  • World Bank Group – mission is to help ease poverty around the world
objectives1
Objectives
  • Distinguish between a loan’s nominal annual rate, annual percentage rate, and periodic rate
  • Use three methods to calculate finance charges
  • Describe how bankruptcy affects lenders
interest rates
Interest Rates
  • Nominal annual rate – identifies a loan’s annual interest rate without the cost of fees or compound interest
  • Annual percentage rate (APR) – annual cost of a loan, including all interest
  • Periodic interest rate – the interest rate the lender applies to a loan’s outstanding balance to calculate the finance charge each billing period
    • APR ÷ number of periods = periodic interest rate
calculating finance charges
Calculating Finance Charges
  • Finance charge – the cost of carrying the debt, Includes interest and fees (transaction, account-maintenance, and/or late)
    • Average daily balance method – uses the card’s beginning daily balance to calculate
    • Previous Balance Method – uses the amount the customer owed at the end of the previous billing period to calculate
    • Adjusted Balance Method – uses the balance from the pervious month and subtracts payments made during the current period…best for cardholders
loans in default
Loans in Default
  • Not every loan is repaid…default is the borrower’s failure to meet the terms of the loan agreement…most often because the borrower failed to make a payment when it was due
    • Lender can sue for unsecured loans or take possession of the collateral
    • Costs additional money to collect on defaults
bankruptcy
Bankruptcy
  • Bankruptcy – a legal procedure that enables individuals or companies to eliminate or repay some or all debt under the guidance of federal bankruptcy court
    • Have to be unable to pay debts
    • Provides a second chance
    • Remains on borrower’s credit history for about 10 years
bankruptcy1
Bankruptcy
  • Liquidation – converting property to cash
    • Some borrower’s can sell their property to pay the lender
    • Chapter 7 bankruptcy – usually for individuals…releasing from personal responsibility for debt
  • Reorganization – the process of creating a repayment plan to repay debts without liquidating property
    • Chapter 11 bankruptcy – companies
    • Chapter 13 bankruptcy – individuals…must have a steady source of income
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