module three

Question 1

Lending

Answer 1

A loan is an asset for the lender and a liability for the borrower. May also charge fees to cover expenses and generate profit

Question 2

Interest

Answer 2

The charge for a loan. Fixed (interest rates same or an amount of time), variable (vary in relation to a benchmark)

Question 3

Capped interest

Answer 3

although can fluctuate subject to an interest cap

Question 4

Simple interest

Answer 4

principles by rate by time periods

Question 5

Compound interest

Answer 5

interest on principle amount plus whatever interests already occurred

Question 6

Standard variable rate (SVR)

Answer 6

standard rate of interest lenders use, rate borrowers are automatically switched to after fixed terms ended

Question 7

Annual equivalent rate (AER)

Answer 7

annualised rates for savers

Question 8

Annual percentage rate (APR)

Answer 8

represents total cost for credits including fees

Question 9

(CAMPARI)

Answer 9

Character - borrowers integrity, credit history and background.
Ability - managerial and technical competence of a business owner
Means - establishing the borrowers means, looking at their assets and liabilities
Purpose - it must be legal, ethical, relevant and in line with the bank’s lending policy, it also helps establish the level of risk involved
Amount - may not accurately calculate how they need. Too little (not sufficient for purpose), too much (could affect their ability to repay)
Repayment - main sources (income, sale of an asset)
Insurance - security provides a secondary source of repayment in the event the primary source unexpectedly fails

Question 10

(ICE)

Answer 10

Interest - bank considers what rate to charge on loan to compensate for risk involved
Commission and fees - commission compensates the bank for administrative work involved in granting and monitoring the loan
Extras - any relevant products that could be offered to the customer like life insurance or payment protection

Question 11

Credit score

Answer 11

number based on statistical analysis of current and past credit history. The higher the score the less risky a borrower

Question 12

Fico score

Answer 12

calculated using payment history, amounts owed, length of credit history, new credit, credit mix.

Question 13

Payment history

Answer 13

whether the borrower has paid past credit accounts on time (most important factor)

Question 14

Amounts owed

Answer 14

if a person’s using a lot of available credit may indicate they’re overextended

Question 15

Length of credit history

Answer 15

longer credit history will increase score

Question 16

New credit

Answer 16

opening several credit accounts in a short amount of time represents a greater risk

Question 17

Credit mix

Answer 17

takes into account all a person’s borrowing

Question 18

Guarantee

Answer 18

promise made to assume debt obligation of a borrower if they fail to pay what is due

Question 19

MAST test

Answer 19

marketability (how easy it is to sell the asset) ascertain ability of value (how easy it is to value correctly) simplicity of title (how easily ownership can be proved) transferability of title (how easy for bank to gain ownership so it can sell the asset)

Question 20

credit scores benefits to society

Answer 20

economic growth, stimulates saving, more efficient spending

Question 21

Detrimental effects

Answer 21

irresponsible lending can encourage irresponsible borrowing the bank also loses out when loans are not repaid