LENDING

Loans

Presented by S. Cox

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

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 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 Characteristics

Loan policy – keeps balance between the need to make money with the risk involvedPortfolio mix – selecting loans from different

sectorsRate of interest – interest earned on loans

relative to collection costs for the loansRisk diversification – balance between safe

and risky loans

Loan Characteristics

Loan policy is developed by the institutions loan committee…Reviews loan policy on an ongoing basisExplores the development of new loan

productsLooks for trends that will affect profitability or

exposure to riskMakes suggestions for changes to the

policy, which usually takes place once a year

Loan Characteristics

First characteristic – who borrows the moneyConsumer loans – individual borrowersCommercial loans – when a company

borrows money○ Short term – usually paid within a year

Loan CharacteristicsOverview of Commercial Loan Products

Type of Loan Uses

Acquisition Purchase of property or another company

Acquisition and Development

Purchase and improve property

Asset-based For any reason; collateral is held

Bridge Temporary funds to use before long-term financing is acquired

Construction Building new things

Construction improvement and rehab

Purchase an existing property that is then repaired and/or remodeled

Development Adding new houses to a subdivision

Refinancing Pay off debt

Small Business Administration (SBA)

Help small businesses get started

Loan Characteristics

Second characteristic – repayment of the loanOpen-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 Characteristics

Third characteristic – secured or unsecuredSecured 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 loanUnsecured 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 Many organizations and agencies exist

to provide financial assistance and support to businessesSmall 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 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

LENDINGProfits and Losses

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 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 periodAPR ÷ number of periods = periodic interest rate

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 calculatePrevious 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

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 dueLender can sue for unsecured loans or take

possession of the collateralCosts additional money to collect on

defaults

Bankruptcy

Bankruptcy – a legal procedure that enables individuals or companies to eliminate or repay some or all debt under the guidance of federal bankruptcy courtHave to be unable to pay debtsProvides a second chanceRemains on borrower’s credit history for

about 10 years

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 propertyChapter 11 bankruptcy – companiesChapter 13 bankruptcy – individuals…must have

a steady source of income