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Consumer Credit (Effective Interest Rate (EIR) (EIR - Annual rest (PV =…
Consumer Credit
Effective Interest Rate (EIR)
EIR - Annual rest
PV = amt disbursed
PMT = -xx
n = no. of months
Find monthly EIR then x12 to find
Annual EIR
EIR shows the true/real cost of the loan
EIR - Flat interest rate
PV = amt disbursed
PMT = -xx
n = no. of months
Find monthly EIR and x12 to find
annual EIR
EIR -Flat discounted interest rate
PV = amt disbursed
Monthly instalment = -xx
n = no. of months
Find monthly EIR and x12 to find
annual EIR
EIR - Monthly rest
PV = amt disbursed
PMT = -xx
n = no. of months
Find monthly EIR then x12 to find
Annual EIR
Debt Servicing Ratio
bank uses DSR to assess consumer credit for credit facilities that are Term Loan
Purpose is to provide guideline on how much of a person's monthly income is used to service debt
Each bank's DSR varies from 30% - 50%
Formula
Home Loan -TDSR (MAS Notice 645)
TDSR shall not exceed 60%
Formula
Mandatory interest rate of 3.5% to e used for TDSR
Apply a haircut of at least 30% to all variable income
Other considering factors for consumer credit
C
haracter
Integrity, track record and past experience
A
ge
Determine max loan quantum and duration of loan
F
inancial Commitments
Asses gearing and expense
Ability to service loan when economic conditions changes
E
mployment
Stable source of income
Salaried/commission-based
Different methods to compute interest
Flat interest rate
Interest is payable over the loan period
Interest is charged on the principal loan amount for the whole loan period
Formula
Interest
= Principal loan x interest x loan period
Loan disbursed
= Full loan value
Monthly instalment payable
= (Principal loan + Interest) / Loan period
Annual rest interest rate
Interest for each year is charged on the principal loan amount owing at the beginning of that year
Formula
(use financial calculator)
PV = loan amount
n= number of years
i%= annual interest rate
Find
PMT
and divide by 12 to find monthly instalment
Flat discounted interest rate
Interest payment is deducted upfront from the principal loan amount at the point of disbursement
Interest is charged on the principal loan amount for the whole loan period
Formula
To calculate
loan disbursed
= Principal loan - interest
To calculate
monthly instalment payable
= Principal loan / Loan period
To calculate
interest
= Principal loan x Interest rate x Loan
Monthly rest interest rate
Interest for each month is charged on the principal loan amount owing at the beginning of that month
Formula
(use financial calculator)
PV = loan amount
n = no. of years x 12 months
i% = interest rate/12
Find
PMT
to get monthly instalment
Consumer Credit Bureau Report
A repository of factual information on the credit application and repayment records of consumer only
Purpose
Helps lenders to make better lending decisions quickly and objectively
Guards against fraud
To determine whether or not the person applying for credit is likely to repay
Consumer Credit Score
A number used by lenders as an indicator of how likely an individual is to repay his debts and the probability of going into default
Independent assessment of the individual's risk as a credit applicant
Consists of
Default records, if any
Litigation records, if any
Credit repayment trend for past 12 months
Bankruptcy records, 5 years from date of discharge
Records of credit checks made
Closed or terminated credit accounts from 3 years when it was closed/terminated
Basic personal data
Aggregated outstanding balances/credit limits
Margins and Profitability of Loans
Profit Margins: returns earned by bank for assuming risks in lending
Risk trade-off: the higher the risk, the higher the return
Source of profit for banks
Commission, fee or service charge
Interest Charged
: Interest charged on loans must provide satisfactory return to the bank
Varies according to :
-Size of loan
-Risk of loan
-Current market situation
-Profitability of customer
-Duration and purpose of loan
-Type of security offered
-Financial strength of customer
Types of credit facilities
Short term
Personal Line of Credit
Unsecured personal loan that gives access to specified credit limit
Cash advance
an amount of cash borrowed against credit limit
Overdraft
May be secured or unsecured
ST standby credit facility
Withdrawal from Current Acc up to overdraft limit approved
Repayable on demand by bank at any time
Balance transfer
allows conversion of credit line on credit card in the form of cash to pay for purchases
Typically 0% interest but with 1 time processing fee
Usually 6 - 12 months
Medium to Long term
Housing loan
Loan tenure: 5 - 30 years
Interest rate: Fixed or floating rate
Secured term loan to purchase a house
LTV: up to 75% of valuation or purchase, whichever is lower
Car loan
LTV: up to 70% of valuation or purchase, whichever is lower
Secured term loan for the purchase of car
Loan tenure: up to 7 years
Personal instalment loan
Repayment: Fixed monthly instalment for a pre-determined loan tenure
Unsecured term loan of a specific loan amount
Repayment period normally from 12 - 60 months
Renovation loan
Unsecured term loan to finance renovation of property
Loan tenure: 1 - 5 years
Loan amount up to $30,000 or 6 times of monthly salary (whichever is lower)