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Part 4: Loan Application Process

Part 4: Loan Application Process. Dollars & Sense Unit 4: Consumer Credit. Background: Commercial Banks. Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc. Provide funds to borrowers through term loans, lines of credit, bonds, etc

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Part 4: Loan Application Process

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

  2. Background: Commercial Banks 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 Banks & Credit Unions:

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

  4. Bank and Credit Union loan procedures 1 Application applicant prepares proposal and submits to bank or credit union banks and credit unions loan procedures have 4 basic stages 2 Review Bank or credit union evaluates application and sets or negotiates conditions failure Award 3 We will examineat each stage in more detail Paying back, with interest 4

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

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

  7. What is a loan application used for? Collect personal information about the person asking for the loan Give permission to the bank to research you (Credit Report) 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) Determine risk…adjust loan terms and/or amount

  8. The Five Cs of Credit Character Capacity Collateral Conditions Capital

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

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

  11. 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.

  12. Capital • Capital • Your net worth • Do you have savings to fall back on?

  13. 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

  14. 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)

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

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