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Unformatted text preview: CHAPTER 18 CONSUMER LOANS, CREDIT CARDS, AND REAL ESTATE LENDING Goal of This Chapter : To learn about the many types of loans lenders make to consumers (individuals and families) and to real estate borrowers and to understand the factors that influence the profitability and risk of consumer and real estate loans. In addition, the chapter examines how consumer and real estate loan rates may be determined and the options a loan officer has today in pricing loans extended to individuals and families. Concept Checks 18-1. What are the principal differences among residential loans, nonresidential installment loans, noninstallment loans, and credit card or revolving loans? Residential loans are credit to finance the purchase of a home or fund improvements on a private residence. Nonresidential loans to individuals and families include installment loans and noninstallment loans. Short-term to medium-term loans, repayable in two or more consecutive payments (usually monthly or quarterly), are known as installment loans. Installment loans are paid off gradually over time whereas short-term loans individuals and families draw upon for immediate cash needs that are repayable in a lump sum at the end of the loan are known as noninstallment loans. Installment loans usually finance large-ticket purchases, such as automobiles or household furniture, whereas noninstallment loans usually are directed at current living expenses. Installment loans help the bank recover funds that can be reloaned more quickly but they generally require a more intensive credit investigation by the bank. Bank credit cards offer convenience and a revolving line of credit that the customer can access whenever the need arises. 18-2. Why do interest rates on consumer loans typically average higher than on most other kinds of loans? Interest rates on consumer loans are typically higher than on most other kinds of loans since they are among the most costly and most risky to make per dollar of loanable funds. Consumer loans also tend to be cyclically sensitive. Moreover, consumers tend to be relatively unresponsive to changes in interest rates when they go out and borrow money. 18-3. What features of a consumer loan application should a loan officer examine most carefully? A loan officer should examine character and purpose, income levels, employment and residential stability, and pyramiding of debt when evaluating a consumer loan application. 18-4. How do credit-scoring systems work? Credit-scoring systems use statistical techniques (usually multiple discriminant analysis) to classify borrowers based on selected characteristics of each borrower as to whether they are likely or unlikely to repay the loan they have requested....
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- Spring '09