Loans presented by s cox
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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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Lending

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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 characteristics5

Loan Characteristics


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


Profits and losses

Profits and Losses

Lending


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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