Page 114 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 7: Loans and Advances

Self Assessment Notes

Fill in the blanks:
12. The procedure to apply for and sanction of loans and advances ....................... from bank to
bank.

13. Loan Application forms are available with the bank ....................... of cost.
14. The Bank determines ....................... of the applicant before sanctioning loan.

7.6 Evaluating Consumer and Commercial Loans

Consumer loans, while technically any type of loan extended to a single customer, not a business,
are normally associated with personal and unsecured loans. These loans can vary in structure,
but most consumer loans share some general characteristics. As consumer spending continues
to rise, more and more lenders have entered the market, so your options for consumer loans
have increased. Before signing on for one of these loans, you must know how to evaluate each
offer.

7.6.1 Evaluating Consumer Loans

There are many criteria banks and other financial institutions are looking at when someone
applies for a consumer loan in order to accept, refuse or accept “with condition” the demand.
Here is the list of 5 criteria, in order of importance that banks base their decisions on for
consumer loans:
1. Personal Credit: The personal credit, such as the beacon FICO scores, is the number one
criteria by importance. The personal credit is the payment habit of the consumer with
their past and current creditors. The report represents, to the company lender, a projection
of the applicant’s behaviour on their future loan.
“History is bunk” Henry Ford would say, but those who proved to be good payers to their
old lenders will have better chances of being accepted for new loans. On the other side,
applicants with bad credit that include collections, severe late payments or bankruptcies
will have their files dismissed from further evaluation; these types of applicants often
mean future problems for banks.

2. Stability: This is the time an individual takes to be established in society.
(a) Time at their job: The first aspect of stability is the time at their job. The longer the
time someone spends at their current job, the stronger they will be settled
professionally and the lower their chances of becoming unemployed. In the world
of credit, employment guarantees income, the main source for debt payment. The
loss of a job often leads to problem executing payments and increases the risk of
defaulting. Regular payments made on time are more assured when a person has
job stability.
(b) Time at present address: The time at present address is one of the most neglected and
unknown aspect by applicants. However, many statistics and analysis showed that
someone who has lived only for a short period of time at their current address has
more chances of moving away and leave their debt behind. On the other hand,
having lived at the same address for a long time improves the chances of obtaining
credit. This is weighted considerably in the final decision.

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