Lending

1. Loans Presented by S. Cox Lending

2. Objectives • Describe the different types of loans • Explain the types of financing assistance provided to businesses

3. 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

4. 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

5. 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

6. 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

7. 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

8. Loan Characteristics

9. 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

10. 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

11. 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

12. 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

13. Profits and Losses Lending

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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