Ch_15_Consumer_Loans - Evaluating Consumer Loans Evaluating...

Evaluating Consumer
Loans

Evaluating Consumer Loans
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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
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Primary source of repayment is current
income

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

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

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

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

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

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

Types of Consumer Loans
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Credit Cards and Other Revolving
Credit
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Most banks operate as franchises of
MasterCard and/or Visa
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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
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Debit Cards, Smart Cards, and Prepaid
Cards
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Debit Cards
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Widely available
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When an individual uses the card, their
balance is immediately debited
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Banks prefer debit card use over
checks because debit cards have lower
processing costs

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

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

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

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