Part 4: Loan Application Process Dollars & Sense Unit 4: Consumer Credit

Background: Commercial Banks Banks & Credit Unions: 2 Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc. Provide funds to borrowers through term loans, lines of credit, bonds, etc The interest payments on loans are used to pay interest to depositors & are a primary source of profit for the bank or credit union To be profitable/sound, banks & credit unions focus on: maximizing their returns & minimizing the risks they accept

Therefore: 3 their principal expertise is evaluating borrower credit-worthiness... !

Bank and Credit Union loan procedures banks and credit unions loan procedures have 4 basic stages 4 Application Review Award Paying back, with interest failure We will examine at each stage in more detail applicant prepares proposal and submits to bank or credit union Bank or credit union evaluates application and sets or negotiates conditions

Bank & Credit Union loan procedures Application a.Before applying to any particular bank, research and review potential funding sources b.Have initial informal discussions with bank loan officer c.Fill out bank’s or credit union’s loan application form; obtain all necessary data d.Submit the loan application and supporting documents to bank. 5 Application 1 Establishing a personal relationship with the loan officer is very important! !

Loan Application Loan apps ask for: -Name -Address -Social Security # -Income -Loan amount & term -Signature

What is a loan application used for? 1.Collect personal information about the person asking for the loan 2.Give permission to the bank to research you (Credit Report) 3.Income information is used to compare your total amount of debt to your total amount of income (helps determine if you will be able to pay back the loan) 4.Determine risk…adjust loan terms and/or amount

CharacterCapacity Capital CollateralConditions The Five Cs of Credit

Character  Character  Willingness to pay  Background, experience, or abilities  Favorable payment records  Bankruptcies, litigation, settlements 9

Capacity  Capacity  Ability to pay bills when due  Can You Afford a Loan? 10 Debt Payments-to-Income Ratio The percentage of debt you have in relation to your net income

Can You Afford a Loan? Add up all your basic monthly expenses and then subtract the total from your take- home pay. Consider what you might give up to make a monthly loan payment.

Capital  Capital  Your net worth  Do you have savings to fall back on? 12

Collateral  Collateral  a form of security that helps guarantee that the creditor will be repaid  Example: You car is the collateral for a car loan 13

Conditions  Conditions  Things that may affect the borrowers ability to repay a loan Change in the economy Loss of a job Divorce Medical situations (High amount of medical bills) 14

15 Bank & Credit Union loan procedures Application review and loan award Review Award 2 3 Review Negotiate terms* More information requested Commitment letter & term sheet Loan agreement signed Funds received Agreement on terms? YES NO *Terms include, e.g. interest rate, repayment period & collateral Review and award involve the following steps: Application