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Loans Finance by cpb17381

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									              Types of Consumer Loans
Three types
  Installment
  Credit cards/revolving credit
  Noninstallment

Installment Loans
  Require periodic uniform payment of principal and interest
  Frequently used to purchase durable goods
  Typical maturity is 2-5 years
  Usually secured by the item being purchased
  Direct (between bank and consumer) or indirect (funded by a bank
   through a separate retailer/dealer)
  Can be extremely profitable for the banks

Credit Cards and Revolving Credit
  Revolving credit requires a monthly payment whose amount
   depends on the outstanding balance.
  By 2002 over one billion credit cards had been issued in the
   United States. The entire population of the country is only 280
   million. Average balance is $5,800.
  Banks are usually franchises of MasterCard and/or VISA rather
   than issuing their own cards. That way the banks’ cards will be
   accepted anywhere.
  Cards usually require a one-time initial fee plus annual charge.
   Competition is leading increasingly to no-annual-fee cards.
  Credit limits are prearranged but the timing and amount of loans
   are determined by the cardholder.
  Consumers can get credit cards easier than they can get a bank
   loan but the interest rate is much higher.
                                  -2-

 Interest rates are extremely high and "sticky,” unless the rates are
  variable. Variable rates are usually quoted as prime plus.
 Credit cards allow banks to acquire a nation-wide customer base.
  Banks are being created that deal only in credit cards and even
  only online.
 Banks are seeing increasing competition from nonbanks, e.g.,
  store chains, credit unions, airlines, GM, etc.
 Credit cards can be obtained online in less than a minute.
  Applications are evaluated using a credit score (like FICO).
 Banks try to lure credit card customers away from other banks
  with attractive introductory offers on balance transfers, e.g. 0%
  interest for 12 months.
 About 40 % of credit card debt has been securitized.
 Banks have been criticized for making credit cards too easy to
  obtain, leading to higher default rates.
 The default rate on credit card is high and rising, as the stigma
  associated with bankruptcy has largely disappeared.
                                                   -3-



Credit Card Report
The 10 largest credit card issuers account for 75% of the market.
For 2001:
                     Accounts              Charge-offs           Delinquencies (90+ days)
Citigroup            92.9 million*                5.91%                 1.98%
MBNA                                              4.86                  5.09
First USA            55.6                         5.59                  4.46
Discover                                                                3.02
Chase                                             5.48
Capital One          43.8                         4.42                  4.95
Providian **                                     12.70                  8.81
American
  Express
Bank of Am                                        4.90
Household                                         6.69                  4.10
        Compare to Wells Fargo’s net charge-off rate of .84% of all loans.
*North America
**Providian used to be a major subprime lender*** but is abandoning the market because of huge losses.


Secured Credit Cards
The vast majority of credit cards require no security. People with a
poor credit history can obtain secured credit cards. Funds must be kept
in an account at the bank usually equal to the credit limit on the card.
In case of default, the bank can use the funds to pay off the account and
close it.

***Subprime Lending
Banks may actually seek out less-than-prime-creditworthy customers,
assuming that the higher the risk, the higher the expected return.
                                   -4-



Overlines and Open Credit Lines
   An overline is a prearranged loan to cover overdrafts of checking
    accounts: overdraft protection
   Authorized customers can write checks which exceed their
    Balances. The bank covers the overdrafts with loans, usually in
    increments of $50 or $100 or so.
   Customer pays interest from the date of the overdraft.
   The loan is repaid with direct deposits or with periodic payments.
   Open credit lines (prearranged) allow potential individual
    borrowers to obtain a loan by simply writing a check for the
    amount of the loan.


Noninstallment Loans
   Some consumerloans require a single payment of principal and
    interest.
   Credit is extended temporarily in anticipation of a well defined
    future cash inflow, selling a house, a large tax refund, etc.
   Bridge loans in new home buying would be a typical example.


Impact of Taxes
Consumer credit interest expense is no longer ('86) tax deductible. That
has greatly increased the popularity of the home equity loan, because
interest on those loans is still tax deductible.

								
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