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 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 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 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 Characteristics Overview of Commercial Loan Products Type of LoanUses AcquisitionPurchase of property or another company Acquisition and Development Purchase and improve property Asset-basedFor any reason; collateral is held BridgeTemporary funds to use before long-term financing is acquired ConstructionBuilding new things Construction improvement and rehab Purchase an existing property that is then repaired and/or remodeled DevelopmentAdding new houses to a subdivision RefinancingPay off debt Small Business Administration (SBA) Help small businesses get started

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 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  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 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

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 period APR ÷ 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 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  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 – 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

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