1. Granting Loans

2. Objectives Describe the five C’s of credit
Explain how commercial loans are evaluated
Describe the steps in applying for a loan

3. Five C’s of Credit
Banks look at the customer’s creditworthiness…an assessment of a borrower’s ability to repay a loan
Banks must look at the applicants complete financial picture…character, capacity, capital, collateral, and conditions

4. Five C’s of Credit: Character
Character is a loan applicant’s honesty and integrity as shown by how he or she handles debt
Have you used credit in the past?
Have all your bills been paid on time?
How long have you had your current job?
How long have you lived at your current address?
Businesses have character too

5. Five C’s of Credit: Capacity
Capacity is a loan applicants ability to pay debts as shown by cash flow
Lender looks at the amount of money going out (expenses) and the amount of money coming in (income)
What are your current expenses
How much money do you owe?
What is your current income?
Is your income steady?
Individuals: Lenders look for steady employment a salary that can cover expenses and debt
Businesses: Lenders look for steady profit over time

6. Five C’s of Credit: Capital
Capital is a loan applicant’s money, property, and other valuables
If a borrower has valuables they can be used for collateral but if not then the loan may represent a greater risk for the bank

7. Five C’s of Credit: Collateral
Collateral is used to back up a loan
The less collateral a borrower has, the riskier the loan is for the bank
A bank will only consider certain assets as collateral…which must be easily liquidated and may have to be appraised to determine its value

8. Five C’s of Credit: Conditions
Conditions involve the overall environment in which the loan will be given
For example, if you work for a company that has widespread layoffs, this may be a factor that the bank sees as a great risk
Or if the house you are wanting to buy is in an area where the value of the homes has decreased a great deal…the bank may see this as a risk
But on the other hand if you have had an account with the bank for 30 years and never bounced a check or defaulted on any other loans, this may go in your favor

9. Credit Scores
Credit score – a measure of risk based on the borrower’s credit history
Risk – the likelihood of financial loss caused by a borrower failing to repay the principal and interest as specified in a loan
Like a grade on a test…the higher the better
A higher credit score means the customer is a lower risk and will probably pay debts in a timely manner
Generally those with a high credit score will be more likely to be approved for loans than applicants with low credit scores
If both are approved the applicant with a high score will probably have a lower interest rate

10. Credit Scores
Credit bureau – a company that gathers, analyzes, and summarizes credit-related information on consumers
Equifax, Experian, and TransUnion…information only
FICO score is used by most lenders…credit rating used by lenders to predict an applicant’s ability and willingness to repay loans

11. Credit Scores FICO was created by Fair Isaac Corporation
Composed of five elements
Payment history
Amount owed or outstanding debt
Length of credit history
New credit
Types of credit used
Ranges from 300 to 850
A score is not permanent…it is ever changing as consumers get new loans and pay off debt

13. Credit for Commercial Loans
To assess the risk involved with commercial loans, lenders look at the company or organization's:
Balance sheet shows a company’s assets
Cash flow represents the what money is coming in and what money is going out
If the company has more money coming in, the company has a positive cash flow…how much positive cash flow is a factor in determining if a loan is approved and for how much
Collateral is a factor in all secured loans
Lenders use specific formulas to determine the value of a company’s collateral (office buildings, manufacturing equipment, accounts receivable, and even patents and other intellectual material…ideas)

14. Credit for Commercial Loans
Debt Ratios are another factor…they compare debt to income or assets…the greater the ration, the greater the risk is to the lender
Debt-to-income
Debt-service-coverage ratio
Loan-to-value ratio

15. Credit-Application Process
Sometimes banks charge for the credit application when a customer applies for a loan
Maybe small or as much as a few hundred dollars
Pays for verifying employment, credit, and other background information
If the applicant isn’t approved for the loan…the fee is not returned
Cosigner – an individual who sign the loan with the borrower…taking on equal liability for repayment

16. Loan Application Process
Customer completes application
Applying
Customers provide income tax forms, pay stubs, and other documents
Documenting
Bank will verify all submitted information
Submitting
When lenders analyze risks and set conditions on the loan
Underwriting
If approved by the underwriter, the loan is approved
Approving
Signing the loan agreement
Closing
Borrower receives the amount of the loan…in the case of a mortgage loan, the sell receives the funds
Funding