In personal finance, presentation, loan types and institutions, commercial banks prepare to get financially fit by practicing personal finance, credit sources. So in other words, when we’re looking for a loan, we’re more looking for some type of credit, where should we go some institutions would include the commercial banks, consumer finance companies, credit unions, life insurance companies, federal service banks, savings and loans associations we’re going to be focusing in here on the commercial banks.
So obviously, when we’re thinking about some type of loan, the bank is probably the first thing that comes to the mind. For most people, they may have more flexibility in the types of loans they offer. And that’s where we will focus in on this time, just a recap on the commercial banks themselves.
They offer consumers and small to midsize businesses with basic banking services, including deposit accounts and loan services, and loans services, they make money from fees and by earning interest income from loans. So notice, the basic idea of the bank, when they’re being dealing with the with the personal finance is that they’re going to be having the savings option where you have a checking account, you’ve got your savings account, so on and so forth, the bank holds on to a reserve, a portion of that not all the money then is in the financial institution, for people savings accounts, and so on, they have the reserve, they’re allowing them to then make the loans.
So then they take out the loans, and they’re going to be earning interest and fees on the loan. So that’s one way the banks are going to be making money they have traditionally been located in physical locations, but more and more now operates exclusively online. So commercial banks lending policies. So we’ll first think about the typical lending policies for commercial banks, what kind of lender are they looking for what kind of general policies might they have, if you’re thinking about financing, and going to a traditional type of bank to do so.
So they look for customers with established credit history. So typically, when you’re going to a bank, of course, they’re looking for customers that have good credit, they want reliable repayment on the loans that they would be providing at the bank often required collateral or security. So if you’re talking about installment loans, in particular, for larger ticket items, which is often what you would be going to the bank for, then for home loans or something like that auto loans, then they might want to collateral, which in essence would mean that the home or whatever is being purchased would be used to support the loan in the event that no repayment was to happen, prefer to deal in large loans like auto home improvements, and home modernization.
So if you’re going to be dealing with the bank, for something other than say, like a credit card type of situation, then they’re typically looking for the larger type of loans, that rather than, you know, a smaller loan, that’s not going to be basically a credit card type of loans, something like an auto loan or a home loan. However, they also deal in credit card and check credit plans. So obviously, the credit cards could be going if you’re dealing with a credit card, which could be smaller types of loans, but they have that revolving credit situation, then the bank might be the place to go there as well determine repayment schedules according to the purpose of the loan.
So obviously, whatever the loan is for, then you can basically set up the repayment schedules. Oftentimes, when you’re looking at larger loans, it will be that installment type of loans, which traditionally which would be repaid in fixed type of amounts, although you can go to more kind of exotic type of loans, which might be interested only in a balloon payment type of loans. So very credit, very credit rates according to the type of credit, the time period customer’s credit history and the security offered.
So when you’re thinking about what you know, what kind of offers would they give you in terms of the rate, it’ll be dependent on different factors such as these the credit the time, and that because the credit history made require several days to process a new credit application. So they’re typically going to be taking their time to try to verify that the person that is applying for the loan has the ability, especially with the longer type of loans with the larger type of loans like mortgages and home loan, a home loans, and the auto loans, they’re going to take more time to process the loan to make sure that it’s in alignment with their requirements for it.
Commercial banks, loan types, so what type of loans might they offer any commercial bank, you’ve got the single payment loans and we’ll go over some of these in more depth in a second. So we’ll just list them out here, single payment loan, personal installment loans, passbook loans, credit card loans, primary mortgages, second mortgages, these are the primary types of loans that you’re probably going to be thinking about when thinking about going to a bank for a loan. So we have the single payment loan, this might not be the most common type of loan that comes to mind.
But so this will be a little bit different than maybe the most standard thing, most of the people would think when you’re thinking about a loan, something like a credit card. And then other types of loans, something like a home mortgage or an auto loan, which are installment loans. This one’s a little bit different here, the single payment loan loans that are paid back with one large payment by the due date decided by the lender.
So instead of paying it back then in the installments, which is going to be the installment loan, you got the one lump sum. So if you needed the money for it for some period of time, and you’re going to pay it back at one point, then you’re thinking about that single payment. One common form of a single payment loan is called a payday loan. So payday loan is one example of a single payment loan. So then we have the personal installment loans, this is probably the more the type of loan that comes to mind more often when you’re thinking about the bank.
Because these are usually the larger longer term loans, the ones that you’re going to have the possibly the security on, and possibly the ones that usually will be set up that you’re going to be paying them back in fixed monthly amounts. So the loan that is repaid in regular installments, as are most mortgages and car loans. They are good for borrowers as a way to finance more expensive items while they provide lenders with regular payments.
So when you’re looking for those more expensive items to finance them, such as a car, such as a home improvement, or home purchase, that is usually set up in the format of an installment loan, they are usually less risky than other alternative loan ones that do not have installment payments, like balloon payment loans or interest only loans. So typically, when you’re thinking about something like purchasing, like a home or something like that, then you have this normal standard payment structure, which would generally be like a set fixed amount of time.
For example, with a home loan, you’re typically thinking a 30 year loan, and you’re setting it up in such a way that you’re going to be paying off set payments, which will be paying off both interest and principal in an even way for the same payments over the 30 year time period. However, you can imagine setting up the loan in different ways, possibly paying off only the interest, possibly having variations that could impact the level or the charge or how much of the interest rate will be over the term of the loan, and possibly having a balloon payment at some later point in the loan,
which could be a more risky situation to be taking on. But it could be appropriate in some in some cases. So generally, when you’re looking at those types of loans, you want to think what’s the normal kind of installment, what’s the normal process, and then it would be relevant to then take on something that would be more kind of exotic type of loan, where an interest only loan or a variable rate type of loan. So your amortization schedule determines how much you pay in monthly installments debt payments, so then you could set up the amortization table.
And that will typically tell you how much you’re going to be paying monthly. And it’ll give you then the breakout between the principal and interest. We’ll talk about how to put together amortization tables, and the breakout between interest and principal a bit more in the practice problems, then we have passbook loans, they allow you to use your savings account as collateral for a loan. So if you have the savings account, and you don’t want to take the money out of the savings account, then possibly you can use the savings account as collateral to take out a loan.
Now you might say why wouldn’t I take the money out of a savings account? Because if you take out the loan, this is what you’re going to be weighing the pros and cons against. If you’ve got the money in the savings account, it will be earning interest. But clearly if you take out a loan, then you’re going to be paying interest to basically pay back the loan. So you might say why don’t I just take the money out of the savings account. So you got that option.
But if you do, it might be locked in the savings account, it might be like in a CD where you’d be penalised to take it out, and you might still want the money that actually have the money in the savings account and then still take on the loan on the banks side of things, it’s going to be more secure or more safe to give someone a loan and use the savings account in essence as the collateral on it in the event of a default on the loan.
So most banks and credit unions set let you borrow up to 100% of the amount in your account. passbook loans may offer lower interest rates, then a credit card or personal loans that do not have collateral. So the loans that don’t have collateral, they might, they might then offer a higher rate due to the increase in the risk. So this could be a way to have that type of credit with without having the added risk and still keep some money in the savings account with a passbook loan, you will be essentially paying interest on your own funds because you’re basically paying interest with the collateral of the funds that are in your savings account.
They may improve your credit score if your bank or credit union reports your payments to the credit agencies. So if you’re taking one of those out, you might want to ask that with the credit agency to see to make sure that you’re getting the benefit on your credit score if you can. Then we have the primary mortgages. mortgages are loans that are used to buy homes and other real estate, the property will be collateral for the loan. So clearly when we’re thinking about a mortgage, if you’re thinking about purchasing the home, that’s usually when you’re thinking about the primary mortgage, because it’s going to be based on the purchase of the home, generally.
And then the home itself is collateral, meaning that if you default on the loan, then you’d have to be you they could foreclose on the property. Note that it’s a little bit confusing, because a lot of people say, well, the bank owns part of your home. And I can, you can kind of say that that’s a common term, but that’s not really the case. It’s the basically the you own the home, you own a loan, and then you have the collateral, then you have the collateral.
So if you were to default on the on the loan, then the bank has the recourse for the home, in essence, so that’s the normal process for the mortgages. mortgages are available in different types, including fixed rate and adjustable rate. So this is another area where you can basically say there’s a fixed rate, which is basically an installment type of loan, that’s going to be set up with a fixed amount of payments, that’s usually going to be easier to compare and contrast, it’s usually a safer way to go,
especially if you’re if you’re a home purchaser and you’re going to be purchasing the home for use over the life of the home as opposed to someone who’s going to be trading the home or selling it in a shorter period of time. And then you typically would want to compare the the normal kind of process, which would be the 30 year fixed that can kind of lock you in to to hopefully a payment that you can basically pay and then consider whether or not the adjustable rate, which is something that can allow people to basically start out in the home and possibly have a rate that could adjust over time.
But you got to be aware of the fact that that that change, of course, when adjust could result in an increase in the payments and make sure that you can be budgeting for the increase in the payment. If you’re going to be selling the home in a short period of time, then you can take into consideration that as well within the the judgment of what’s the best loan options, we’ll talk a little bit more about the calculations of the loans. In our example, problems, the cost of a mortgage will depend on the type of loan, the loan term and the interest rate charged, mortgage rates can be very can vary widely depending on the type of product and the qualifications of the applicant.
So clearly, qualifications are going to be a big deal, they want to because the more secure the the applicant is, the less risk is involved and typically less risk will result in the lower rates. And then we have the second mortgage. So a second mortgage is a loan made in addition to the homeowners primary mortgage, homeowners might use a second mortgage mortgage to finance purchases like college or a new vehicle, or even as a down payment on the second home.
So if you’re if you have equity in the home, maybe the value of the home is greater than the loan amount, you may be able to get a loan against the equity and the home, although you want to make sure that you’re careful in doing that, and making sure that you’re looking at the tax code and what you need to use that that money for there any restrictions in terms of what you’re going to use the money for in order to be able to deduct, in essence, the the interest on the money, obviously, one of the major benefits of the home loans is that you may be able to get a tax benefit.
So you want to make sure you’re taking into consideration whether or not and what is the tax benefit related to any kind of mortgages. So second mortgages often have higher interest rates than first mortgages, but lower interest rates than the personal bank loan or credit card. So oftentimes, it’s possible to get a better rate and due to the collateral of the home, and therefore less risk generally, that would be involved to the institution.
So although a second mortgage might be higher than the first because it would be more risky to take on more debt than what is already in in the home and so on, it’s usually going to be less risky than other types of financing. So if you’re going to have financing, it’s often good to have it in the home because it could lower the rate. And again, if it’s possible to get a tax benefit from it, then your net rate would be would be lower as well. It can be expensive, because you must pay upfront the closing costs similar to a first mortgage.
So clearly when you’re refinancing, it is a longer process a lot of just processing of the paperwork. And that cost just for that process can be costly. So you got to be weighing the cost to process the loan versus the benefit they could be involved with with the with the rates of the loan. So you need to decide the amount of equity in your home to take out the significant second mortgage loan.
We’ll talk a little bit about this in our practice problems. But clearly, when you purchase the home, it’s quite likely given the fact that you’re you have a large purchase that a little bit of a percentage increase in the market rate could result in your home value going up significantly in terms of your spending dollars, which means that you might then be able to take a loan against the home again as the as the value of the home goes up.
You Got to be careful. Of course, we’re doing that because as we have seen in the past, it is possible for values of the home to go down, not just not given that there’s just going to go up forever. So you got to be careful on taking too much equity out of the home or vary the equity in the home. But of course, if there’s more equity in the home, then the bank might be more willing to make loans up into a greater amounts, given the fact that they have the support of the home as collateral in the event that the loan is not repaid.