Please enable JavaScript.
Coggle requires JavaScript to display documents.
Consumer Lending and Borrowing (Consumer Lending Institution (FI …
Consumer Lending and Borrowing
Consumer Lending
Institution
FI
diversify lending operation
across diff types of loans
bring all major
consumer lenders
into direct
competition
Commercial Banks
Approach customer
--
direct lending
--purchase of
installment paper
from merchants
--making
loans
to other
consumer lending institutions
Consideration Factors in
Making Consumer Loans
Consumer loan - greater risk - more profitable
Consideration
ratio of
household debt to gross income
duration of
employment
of borrower
past payment
record
ownership
of valuable properties
number of
breadwinners
in family
Consumer
Borrowing
Categories
Installment credit
LT non-residential purposes
buy now, pay later
, e.g. credit card
credit card -
revolving credit
-
borrow up to pre-specified limit
, repay and borrown again
remove "liquidity" constraint -
restrict spending power
of consumer
ADV:
convenience
Non- Installment Credit
ST case need to paid off in lump sum
e.g. debit card - instant cash available, check cashing easier, rapid electronic pmt for g&s
"smart card" - customer's acc no, balance available for sending
substitute of immediate spendable cash
Residential mortgage credit
home equity loans
lower default rate
- borrower feel more responsible - home pledged as
collateral
cost
of home equity loans -
lower
int rate that adjust to market rate - whereas others are fixed rate
Determinants
Biz cycle
economic expansion
: new
borrowings outstrip repayments
of outstanding loans & total household
debts incr
recession
-
build
up on
savings
,
cut
back on
borrowings
Price expectations
influence
consumer borrowings
when
rate of inflation accelerates
Postpone
on purchasing -
cost more
in future
Income x increase as fast as price, consumer '
buy now
' through borrowing than postpone purchase
Stage in life
Young families
-
heavy debt
- purchase of new home, automobile, appliances, furnitue
Family's income rises, children leaves home & savings incr, borrowing fall --
older families
expect
savings for retirement
rather than borrowings
Size of ind or family income & accumulated household wealth
Families - larger income & greater wealth accumulated - use greater debt amount
(+) r/s
debt and income
Int rate
Shape
volume and direction of consumer borrowings
int r rise, consumer borrowing incr
economic expansion peak - rising of intr costly - consumer borrowings decline
drop in borrowing - drop in spending
Intro
Individual and families
Principal source of loanable fund
Largest borrowing group
Consumer
Borrower of Funds
consumer spending
- largest component GDP
slower spending - slower eco growth
Household portfolio effect
- consumer may alter their
spending level
- comfortable with balance of income, financial asset & liabilities
Wealth effect
- ok with
heavier debts
- can sell off higher valued financial asset if trouble happened
Lender of Funds
Supplied when they
purchase financial assets
from other units in economy
Financial asset: Corporate stocks - pension fund - life insurance - deposits in banks - corporate bonds
Factors affecting savings:
new financial instruments
Greater financial flexibility, higher return rates
Financial flexibility - easier access to
liquid funds
; ability to
move funds
easily
Credit Scoring
Techniques
Advanced statistical techniques
assemble info
about applicants for consumer loans
analyze info
gathered
develop
numerical score
using score, decide high enough score to
qualify loan