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LENDING

LENDING. Banking & Finance. www.m.g-wlearning.com. Activity: Small Group Discussion 3 minutes. What institutions are responsible for making loans? How do loans benefit a financial institution? What are the risks involved in lending money? Prepare to share your responses with the class.

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LENDING

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  1. LENDING Banking & Finance

  2. www.m.g-wlearning.com

  3. Activity: Small Group Discussion 3 minutes • What institutions are responsible for making loans? • How do loans benefit a financial institution? • What are the risks involved in lending money? Prepare to share your responses with the class

  4. Word Study Loan Secured Loan Unsecured Loan Collateral

  5. www.m.g-wlearning.com

  6. Loans • Describe the different types of loans. • Explain the types of financing assistance provided to businesses.

  7. Loan Characteristics What’s a Loan? Characteristics Loan Policy Consumer and Commercial Open and Closed Secured and Unsecured • money temporarily transferred to a borrower in exchange for repayment and interest • Principal: amount a bank loans to a customer • Why do individuals and businesses borrow money?

  8. Any lending institution must balance the need to make money with the risk involved.

  9. Loan Policy(followed to keep things in balance) • 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 Certain guidelines are included in these policies:

  10. Loan Policy(developed by the bank’sloancommittee) • 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; and • Makes suggestions for changes to the policy (once a year)

  11. The first characteristic used to classify loans is based on who borrows the money. Consumer Loan Commercial Loan When a company borrows money. Equipment, machinery, or inventory • When an individual borrows money for his or her own use. • Personal, family, household needs

  12. Overview of Commercial Loan Products

  13. The second characteristic used to classify loans is based on repayment of the loan. Open-ended Loan Closed-end loan Must be paid in full on a specific date Example: installment loan (for a large amount of money, repaid in smaller amounts over specified period of time) • Does not have to be paid in full by a specific date • Example: credit card

  14. Security means safety. Secured Loan Unsecured Loan Not backed by collateral aka signature loan Why? Interest rate usually higher Payment late? Add’l fees applied. Bank can sue borrower • Backed by borrower’s property (collateral) • Example: car loan

  15. Financial Assistance to Businesses Small Business Administration (SBA) Export-Import Bank of the United States Ex-Im Bank Helps businesses export American goods and services to foreign countries Created by presidential decree in 1934 Changes due to increased globalization • Created in 1953 as an independent agency of the federal gov’t • Purpose to help Americans start and grow businesses • Much help in form of loans

  16. Financial Assistance to Businesses Farm Service Agency (FSA) World Bank Group (WBG) Loans and grants easing poverty around the world • Provides financial and logistical support to commercial farms • Part of US Department of Agriculture (USDA) • Makes loans and provides guaranties for others • USDA does not make loans, but makes grants

  17. Checkpoint 8.1 • What is a lending institution balancing when it makes a loan? Name 2 things. • List the types of commercial loans. • A credit card is considered what type of loan? Why? • Why is collateral important to the bank when granting a loan to customers? • Why is an unsecured loan also known as a signature loan?

  18. Bellringer Word Study Equity Mortgage

  19. Activity • Make a list of things that affect the interest rate of a loan. • Prepare to share your ideas with the class.

  20. Real EstateLoans • Describe the characteristics of a mortgage loan. • Explain a home-equity loan.

  21. MortgageLoans • Real estate: section of land, air above it, ground itself, and any buildings on the land • Mortgage loan: made to purchase real estate • Secured loan. Why?

  22. Government-BackedMortgage Programs • Federal Housing Administration (FHA) guarantees home loans with down payments of 3% or less. • Veteran’s Administration (VA) provides loan guarantees to lenders that make loans to qualifying veterans. • Ginnie Mae (gov’t-owned corporation that backs loans made by FHA and VA) puts together a group of FHA loans • Sells bonds guaranteed by US gov’t (mortgage-backed securities—MBSs)

  23. Government-BackedMortgage Programs • Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) • public interest is in increasing homeownership and affordable rental housing • Chartered and supported by the gov’t to promote a public interest • Publicly traded. . . Meaning what? • Not backed by government

  24. Nature of MortgageLoans • Mortgage Interest Rates • Fixed-rate: rate stays the same for entire term of loan • Adjustable-rate (ARM): rate may change over the life of loan • Look for a cap: identifies max increase that can apply • Term: number of years loan will exist • 15 and 30-year • Closing costs: fees applied when mortgage is signed.

  25. Nature of MortgageLoans

  26. Activity • Go to Autotrader.com • Perform the same formula on previous slide to the car you would like to purchase • Calculate the difference between a 2- and a 6-year loan on the car • Submit.

  27. Bellringer • Why is the interest rate for an unsecured loan often higher than the interest rate for a secure loan?

  28. Applying for a Mortgage • Potential buyer must have finances in order • Fill out mortgage application • Provide info and supporting documents • Lender will order credit report • Lender provides good faith estimate • Loan goes to underwriter (approval or denial)

  29. Mortgage-RelatedLaws • Real estate taxes and homeowners insurance must be held in an escrow account set up by the lender. • Escrow account: account in the name of the borrower and is separate from the mortgage account. • Buyers who finance more than 80% are required to pay private mortgage insurance (PMI) • PMI: insurance policy that pays the lender if the borrower defaults

  30. Small Group Activity In your group, perform research on the following mortgage-related laws: • Jacks: Truth-in-Lending Act • Queens: Community Reinvestment Act • Kings: Home Mortgage Disclosure Act • Aces: Equal Credit Opportunity Act Each group member must report 1 fact on the assigned act.

  31. Bellringer • Explain the difference between a fixed rate mortgage and an adjustable rate mortgage.

  32. EquityLoans • Equity: difference between the real estate’s value and the amount owed for the real estate • Belongs to the owner • If owner sells, they pay off the loan first. • Amount of money left is the equity • Equity loan: temporarily transfers cash to the borrower

  33. Relationship Between Equity and Value

  34. EquityLoan (second mortgage)Characteristics • Consumer and Commercial • Consumer: pay off credit cards, improve real estate, or pay education costs • Commercial: purchase add’l equipment or inventory, repair or improve equipment, or expand the business • Interest Rates • Higher than a mortgage interest rate • Same property being used to secure 2 loans • 1st loan (mortgage) paid before 2nd loan (equity loan) • Term and Fees • 5 to 30 years

  35. Checkpoint 8.2 • Why is a mortgage a secured loan? • What public interest are Fannie Mae and Freddie Mac chartered to promote? • How does a fixed rate loan benefit the lender? • How do you calculate the owner’s equity if he or she has a mortgage loan? • Why would a consumer use a home-equity loan to pay off credit card debt?

  36. GrantingLoans • Describe the five C’s of credit • Explain how commercial loans are evaluated • Describe the steps in applying for a loan

  37. Paired Activity • Break up into pairs. • Role-play a customer applying for a loan, with one person acting as the loan officer, and the other person acting as the individual trying to apply for a loan. • Prepare to report.

  38. Word Study Predatory Lending

  39. Individual Activity • Research the factors that negatively affect an individual’s credit score. • What things should students refrain from doing if they want a good credit score? • Do any of these things matter more than the others?

  40. Creditworthiness (assessment of a borrower’s ability to repay a loan)

  41. Credit Scores • Measure of risk based on the borrower’s credit history • Risk: likelihood of financial loss caused by a borrower failing to repay the principal and interest specified in a loan • Higher is better • Credit bureau: company that gathers, analyzes, and summarizes credit-related info on consumers • Equifax, Experian, and TransUnion • Free report every 12 months • FICO score: credit rating used by lenders to predict applicant’s ability to repay • Ranges from 300-850

  42. Credit for Commercial Loans To assess the risk involved with commercial loans, lenders look at the company or organization’s balance sheet, cash flow, and collateral. • Commercial debt ratios are another factor in determining approval • Debt ratios compare debt to income or assets

  43. Commercial Debt Ratios

  44. Credit-Application Process

  45. Bellringer If a home’s value is $150,000 and the balance of the mortgage loan is $80,000, how much equity does the owner have?

  46. Subprime Loans • Loan with fees and interest rates that are higher than the rates given to a person who meets all of the underwriting criteria • The Crisis of Credit Visualized

  47. Checkpoint 8.3 • List the five C’s of credit. • What are the three things that would show an applicant has good character? • How does a FICO score affect a loan application? • When considering the risk posed by a commercial loan, what three things do lenders look at? • Why would an applicant ask someone to cosign a loan application?

  48. Profits and Losses • 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.

  49. Interest Rates Lenders are required to disclose the nominal rate, annual percentage rate (APR), and the periodic rate for every loan made • Nominal annual rate: identifies loan’s annual interest rate w/out cost of fees or compound interest • Annual percentage rate (APR): annual cost of a loan, including all interest • Periodic interest rate: interest rate the lender applies to a loan’s outstanding balance to calculate finance charge each billing period.

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