Evaluating Consumer
Loans

Evaluating Consumer Loans
n
Today, many banks target individuals
as the primary source of growth in
attracting new business
n
Consumer loans differ from
commercial loans
n
Quality of financial data is lower
n
Primary source of repayment is current
income



Types of Consumer Loans
n
Evaluating Consumer Loans
n
An analyst should addresses the same
issues discussed with commercial
loans:
n
The use of loan proceeds
n
The amount needed
n
The primary and secondary source of
repayment

Types of Consumer Loans
n
Evaluating Consumer Loans
n
Consumer loans differ so much in
design that no comprehensive
analytical format applies to all loans

Types of Consumer Loans
n
Installment Loans
n
Require the periodic payment of
principal and interest

Types of Consumer Loans
n
Installment Loans
n
Direct
n
Negotiated between the bank and the
ultimate user of the funds
n
Indirect
n
Funded by a bank through a separate
retailer that sells merchandise to a
customer

Types of Consumer Loans
n
Installment Loans
n
Revenues and Costs from Installment
Loans
n
Consumer installment loans can be
extremely profitable
n
Costs $100 - $250 to originate loan
n
Typically yield over 5% (loan income
minus loan acquisition costs,
collections costs and net charge-offs)

Types of Consumer Loans
n
Credit Cards and Other Revolving
Credit
n
Credit cards and overlines tied to
checking accounts are the two most
popular forms of revolving credit
agreements
n
In 2007, over 92% of households had
credit cards (average of 13 cards)

Types of Consumer Loans
n
Credit Cards and Other Revolving
Credit
n
Most banks operate as franchises of
MasterCard and/or Visa
n
Bank pays a one-time membership fee
plus an annual charge determined by
the number of its customers actively
using the cards

Types of Consumer Loans
n
Debit Cards, Smart Cards, and Prepaid
Cards
n
Debit Cards
n
Widely available
n
When an individual uses the card, their
balance is immediately debited
n
Banks prefer debit card use over
checks because debit cards have lower
processing costs

Types of Consumer Loans
n
Debit Cards, Smart Cards, and Prepaid
Cards
n
Smart Card
n
Contains a memory chip which can
store information and value
n
Programmable such that users can
store information and add or transfer
value to another smart card
n
Only modest usage in the U.S.

Types of Consumer Loans
n
Debit Cards, Smart Cards, and Prepaid
Cards
n
Prepaid Card
n
A hybrid of a debit card
n
Customers prepay for services to be
rendered and receive a card against
which purchases are charged
n
Use of phone cards, prepaid cellular,
toll tags, subway, etc. are growing
rapidly

Types of Consumer Loans
n
Credit Card Systems and Profitability
n
Card issuers earn income from three
sources:
n
Cardholders’ annual fees
n
Interest on outstanding loan balances
n
Discounting the charges that
merchants accept on purchases

Types of Consumer Loans
n
Credit Card Systems and Profitability
n
Despite high charge-offs, credit cards
are attractive because they provide
higher risk-adjusted returns than do
other types of loans




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- Fall '08
- cobus
- Interest, Personal Finance, Fair Credit Reporting Act, Revolving credit