6. Credit and Consumer Lending Flashcards
What are the 4Cs of credit?
- Character
- Capacity
- Collateral
- Capital
What does character refer to? How is it tested?
The integrity of the borrower is paramount, which is why interviews and discussions with the customer are so important
What does capacity refer to? What factors should be considered?
Refers to the borrower’s ability to repay the loan.
It is important to consider the following factors:
- Age
- Employability and experience
- Reputation and credit history
What does collateral refer to? What are some common forms?
Refers to the assets being provided to secure the loan. Collateral is typically required as a way to reduce the lender’s risk.
Some common forms of collateral include:
- Real estate
- Cash accounts (excluding retirement accounts such as superannuation)
- Vehicles and equipment
- Personal/third-party guarantees
What does capital refer to? What can it also be referred to as?
The amount of capital, often referred to as the deposit or equity provided by the customer, can indicate their commitment to the purpose of the loan.
What is a customer’s net position? What else can it be referred to as and how is it calculated?
The value of one’s investment position, calculated as the position’s market value less the initial cost of entering that position. Or put simply, the summation of the client’s assets less their liabilities.
What are the bank fees involved in consumer and credit lending? How can they be categorised?
Application fees can range from $300 to $1000 and may be added to the borrowing or paid separately by the customer.
Fees included can be separated into:
- Upfront fees
- Ongoing fees
How can bank fees be adjusted?
The amount of the application fee can be negotiated between the lender and the customer at the time the borrowing is agreed. Some or all of the fees can also be reduced or removed with the acquisition of a tailored package.
What is the LVR and what does it represent?
The loan to value ratio reflects the size of the borrowing compared to the value of the asset being purchased.
How is the LVR calculated?
When calculating the LVR, the figure taken for the asset should be the lower of the cost or the bank valuation of the asset.
What are typical loan term periods?
How factors influence the loan term and total interest repayments?
As a rule, the loan term is decided by taking into account the borrower’s age, capacity to repay, and the purpose of the loan. Plus, the amount of interest to be paid over the life of the loan.
Generally, the longer the term of the borrowing, the higher the total interest the customer will pay.
What are the typical periods of residential loans?
Residential loans are taken over a 30-year period, with a maximum of 5 years interest only.
What are six acceptable types of income that can be used as capital sources for loans?
- Salary and wages (including overtime, shift allowances and bonuses)
- Dividend/interest income
- Employment allowances
- Rental income from residential or commercial property holdings
- Supplementary employment income
- Family tax benefits or other government payments
What are the three principles involved in verifying customer claims about their financial situation?
- Recency of documentation (e.g. payslips no older than 30 days)
- Consistency of information (from existing records or previous applications)
- Benchmarking (utilising experience and knowledge of other customers to validate information provided)
What are the three essential qualities of good security?
- Simplicity of ownership
- Stability of value
- Saleability or realisation
What is simplicity of ownership in security?
The lender must ensure that the security is to be free of all liabilities or encumbrances of any nature which might prevent any future action that they may want to take regarding the security.
What is stability of value in security? What are some examples of securities that are easy versus hard to value?
It is important that the lender can rely on the value of the security.
Easiest types of security to value:
- Cash lodgements or term deposit holdings
- Residential property
- Listed shares
More difficult to value:
- Specialised or commercial property
- Furniture, fixtures and fittings
- Unlisted shares
- Managed investment funds
What is saleability or realisation in security?
In situations where a borrower is not able to make their agreed repayments a bank may have to ‘cash in’ or sell (realise) the security held.
What are five types of interest rates used in lending?
- Fixed rate
- Variable rate
- Hybrid or split rate
- Introductory rate
- Comparison rate
What is a fixed interest rate?
Allows a customer to lock in an interest rate, providing the certainty of knowing what their repayments will be over the agreed fixed period, typically 1-5 years.
What considerations should customers take into account when choosing a fixed rate?
- There may be restrictions on making additional repayments during the period when the loan is fixed
- Borrowers may have to pay a significant break fee for ending a fixed rate early, particularly if interest rates have fallen since the commencement of the fixed rate period
What is a variable interest rate? What influences the variable rate?
The rate fluctuates mainly in response to changes in the cash rate. It may also fluctuate due to other commercial considerations by the credit provider, such as competitor rates, regulatory changes and funding costs.
When are loans classified as regulated?
When are loans classified as non-regulated?
