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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