1. Granting Loans

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

3. Five C’s of Credit • Banks look at the customer’s creditworthiness…an assessment of a borrower’s ability to repay a loan • Banks must look at the applicants complete financial picture…character, capacity, capital, collateral, and conditions

4. Five C’s of Credit: Character • Character is a loan applicant’s honesty and integrity as shown by how he or she handles debt • Have you used credit in the past? • Have all your bills been paid on time? • How long have you had your current job? • How long have you lived at your current address? • Businesses have character too

5. Five C’s of Credit: Capacity • Capacity is a loan applicants ability to pay debts as shown by cash flow • Lender looks at the amount of money going out (expenses) and the amount of money coming in (income) • What are your current expenses • How much money do you owe? • What is your current income? • Is your income steady? • Individuals: Lenders look for steady employment a salary that can cover expenses and debt • Businesses: Lenders look for steady profit over time

6. Five C’s of Credit: Capital • Capital is a loan applicant’s money, property, and other valuables • If a borrower has valuables they can be used for collateral but if not then the loan may represent a greater risk for the bank

7. Five C’s of Credit: Collateral • Collateral is used to back up a loan • The less collateral a borrower has, the riskier the loan is for the bank • A bank will only consider certain assets as collateral…which must be easily liquidated and may have to be appraised to determine its value

8. Five C’s of Credit: Conditions • Conditions involve the overall environment in which the loan will be given • For example, if you work for a company that has widespread layoffs, this may be a factor that the bank sees as a great risk • Or if the house you are wanting to buy is in an area where the value of the homes has decreased a great deal…the bank may see this as a risk • But on the other hand if you have had an account with the bank for 30 years and never bounced a check or defaulted on any other loans, this may go in your favor

9. Credit Scores • Credit score – a measure of risk based on the borrower’s credit history • Risk – the likelihood of financial loss caused by a borrower failing to repay the principal and interest as specified in a loan • Like a grade on a test…the higher the better • A higher credit score means the customer is a lower risk and will probably pay debts in a timely manner • Generally those with a high credit score will be more likely to be approved for loans than applicants with low credit scores • If both are approved the applicant with a high score will probably have a lower interest rate

10. Credit Scores • Credit bureau – a company that gathers, analyzes, and summarizes credit-related information on consumers • Equifax, Experian, and TransUnion…information only • FICO score is used by most lenders…credit rating used by lenders to predict an applicant’s ability and willingness to repay loans

11. Credit Scores • FICO was created by Fair Isaac Corporation • Composed of five elements • Payment history • Amount owed or outstanding debt • Length of credit history • New credit • Types of credit used • Ranges from 300 to 850 • A score is not permanent…it is ever changing as consumers get new loans and pay off debt

13. Credit for Commercial Loans • To assess the risk involved with commercial loans, lenders look at the company or organization's: • Balance sheet shows a company’s assets • Cash flow represents the what money is coming in and what money is going out • If the company has more money coming in, the company has a positive cash flow…how much positive cash flow is a factor in determining if a loan is approved and for how much • Collateral is a factor in all secured loans • Lenders use specific formulas to determine the value of a company’s collateral (office buildings, manufacturing equipment, accounts receivable, and even patents and other intellectual material…ideas)

14. Credit for Commercial Loans • Debt Ratios are another factor…they compare debt to income or assets…the greater the ration, the greater the risk is to the lender • Debt-to-income • Debt-service-coverage ratio • Loan-to-value ratio

15. Credit-Application Process • Sometimes banks charge for the credit application when a customer applies for a loan • Maybe small or as much as a few hundred dollars • Pays for verifying employment, credit, and other background information • If the applicant isn’t approved for the loan…the fee is not returned • Cosigner – an individual who sign the loan with the borrower…taking on equal liability for repayment

16. Loan Application Process