Consumer Loans, Credit Cards and Real Estate Lending: Prepared By: Banking Department Faculty of Finance and Banking

Consumer Loans, Credit cards
and Real Estate lending
Prepared by: Banking department

Faculty of Finance and Banking
Chapter 5: Consumer loans, credit cards

06/27/2022 1
and real estate lending
Key topics
• Types of Loans for individuals and families

• Unique Characteristics of Consumer
Loans
• Evaluating a consumer loan request
• Credit cards and credit scoring
• Disclosure rules and discrimination
• Loan pricing and refinancing

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Google: Cho vay tiêu dùng

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Outstanding loan of consumer
loans

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Introduction
1. Has been among the most popular financial services

offered in recent years
2. One of the most important sources of revenues and
deposits for banks and their competitors (credit
unions, savings associations, and finance and
insurance companies); a source of supplemental
income
3. On the other hand, presents a special challenge due to
higher-than-average default rates.
06/27/2022 5
Introduction
• Consumer debt is one of the fastest

growing
• Reaching more than $10 trillion in volume
in the US.
>> Services directed at consumers can be
among the most costly and risky financial
products.

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Thông tư Số: 43/2016/TT-NHNN:
* Cho vay tiêu dùng là việc công ty tài chính cho vay bằng
đồng Việt Nam đối với khách hàng là cá nhân nhằm đáp
ứng nhu cầu vốn mua, sử dụng hàng hóa, dịch vụ cho mục
đích tiêu dùng của khách hàng, gia đình của khách hàng đó
với tổng dư nợ cho vay tiêu dùng đối với một khách hàng tại
công ty tài chính đó không vượt quá 100.000.000 đồng (một
trăm triệu đồng).
* Mức tổng dư nợ quy định tại khoản này không áp dụng
đối với cho vay tiêu dùng để mua ôtô và sử dụng ôtô đó làm
tài sản bảo đảm cho chính khoản vay đó theo quy định của
pháp luật.
06/27/2022 7
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Classification of loans

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Classification of loans
 By purposes: What the borrowed funds will be

used for
 By type: repay in installments or lump sum
 By combination of both:
Residential loan
Nonresidential loans:
Installment loans
Non-installment loans
Revolving credit loans
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Types of loans
• Residential mortgage loans

• Nonresidential loans
– Installment loans
– Non-installment loans
– Credit card loans and revolving credit

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Residential mortgage loans
(Cho vay tiêu dùng cư trú)
• To purchase of home or to fund

improvements on a private residence
• Give rise to a long – term loan
• Either fixed interest rate and floating
interest rate.

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Group question
1. Why does bank offer floating rate?

2. As a customer, which one you prefer –
floating or fixed interest rate?

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Nonresidential loans
(Cho vay tiêu dùng phi cư trú)
• To individuals and families

• Include:
 Installment loans (cho vay trả góp)
 Non-installment loans (Trả một lần)
 Hybrid form (through credit card) (kết hợp)

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Installment & non-installment
loans
• Installment: short to medium –term,

repayable in two or more consecutive
payment.
• Non-installment: borrower need for
immediate cash and repayable in a lump
sum (một lần)

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Credit card loans and revolving credit
(Cho vay thẻ tín dụng- tín dụng tuần hoàn)
• Credit cards issued by VISA, MasterCard,

Discover and many other credit card
company.
• Offer both installment and non-installment
credit
• Offer convenience and a revolving line
of credit

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Debit cards:
A partial substitute for credit cards
• Debit card (or plastic cards): that may

be used to pay for goods and services, but
not to extend credit.
• Must pay immediately without borrowing
money.

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Quizz 1
1. The purchase of a house or a multifamily

dwelling such as a duplex, triplex or
apartment building is usually financed
through the use of a …..loan
A. Residential mortgage
B. Non-installment loan
C. Installment loan
D. Debit
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2. A(n)___________ loan is a short- or
medium-term loan repayable in two or more
consecutive payments, usually monthly or
quarterly
A. Installment loan
B. Non-installment loan
C. Repayable loan
D. Credit card
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3. Short-term credit to finance the building of
home or other dwellings is called:
A. Construction loans
B. Non-installment loans
C. Installment loans
D. Business loans

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Characteristics of consumer loans
• High interest rates

• Tend to be cyclically sensitive: follow
economic cycle
• Interest inelastic: Consumers more
concerned about the size of monthly
payments than the interest rate charged.
• Education and income levels influence
consumers’ use of credit.
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Evaluating a consumer loan application

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Evaluating a consumer loan
application
1. Character and purpose

2. Income levels
3. Deposit Balances
4. Employment and residential stability
5. Pyramiding of debt
 How to qualify for a consumer loan
 The challenge of consumer lending

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1. Character and purpose
• Key factors: ability to pay and moral

responsibility to repay on time.
• To be reassure: Check with credit bureaus
(trung tâm tín dụng tư nhân)
– In Vietnam:
o CIC: Trung tâm tín dụng quốc gia Việt Nam
o PCB: Công ty CP thông tin tín dụng Việt Nam
• Cosigner (người cùng chịu trách nhiệm) :In case
without credit records or poor track record of
repaying loans.
06/27/2022 24
2. Credit bureau – Credit report
Credit bureau: a company that gathers

information on credit users and sells that
information in the form of credit reports to
businesses offering credit.
• Shows the debt you owe
• How often you use credit
• Whether you pay your debts on time
• Length of your credit use
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3. Income level
• Size and stability are important.
!!! Net salary vs Gross salary

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4. Deposit balances
• Indirect measure is daily average deposit

balance maintained.
• Lenders may be granted the right of offset
against the customer’s deposit as additional
protection
~ Right of offset: permits the lender to call a
loan that is in default and seize any checking
or savings deposits the customer may hold in
order to recover its funds
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5. Employment and residential
stability
Duration of Length of
employment residence

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6. Pyramiding of debt
> Where the individual draws credit at one

lending institution to pay another.
>> Credit cards

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CREDIT SCORING CONSUMER LOAN
APPLICATIONS

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What are the benefits of Credit scoring system?

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Credit scoring
• Lenders use ‘credit scoring’ to evaluate

the loan applications.
• Advantages:
– Large volume of credit applications
– Reducing operating costs
– Judgment process can be quicker
– Control bad-debt losses

06/27/2022 32
How to evaluate credit scoring?
• Discriminant models !! (Phương pháp định

lượng trong tài chính!  )
• Critical cutoff level: If the applicant’s
score falls below this level -> denied
• Identify the financial, economic and
motivational factors to separate good
loans from bad loans.

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How to evaluate credit scoring?

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Useful variables:
• Credit bureau ratings

• Home ownership
• Income bracket
• Number and type of deposit accounts
owned
• Type of occupation.

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Example of Factors for predicting
credit quality

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Credit line

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CASE STUDY
The Childress family has applied for a $5,000 loan to make home
improvements, especially to install a new roof and add new carpeting.
Bob Childress is a welder at Ford Motor Company, the first year he has held
that job and his wife sells clothing at Wal-Mart.
They have 3 children. The Childress’s own their home, which they
purchased six month ago, and have an average credit rating with some late
bill payments.
They have a telephone, but hold only a checking account with a bank and a
few saving bonds. Ms. Childress has a $35,000 life insurance policy with a
cash surrender value of $1,100.
Suppose the lender uses the credit scoring system presented in this
chapter and denies all credit applications scoring fewer than 360 points. Is
the Childress family likely to get the loan?

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As a loan officer, calculate the point of Childress family based on the
following factors:
• Occupation (for skilled or clerical workers) 75
• Housing Status (own home) 60
• Credit Rating 50
• Time in Job (one year or less) 20
• Time at Current Address (one year or less) 10
• Telephone (years) 20
• Number of Dependents (3) 40
• Bank Accounts Held (checking only) 20
TOTAL: 295 points
This credit request, in the absence of other mitigating factors, would be
denied.

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The FICO Scoring system
• FICO – developed and sold by Fair Isaac

Corporation
• Calculates scores for millions of
consumers worldwide
• Suggest how to improve score
• Range from 300 to 850: Higher values >
Less credit risk.

06/27/2022 41
FICO scoring system
• 5 different types of information (From most to least)

> Borrower’s payment history
> Amount of money owed
> The length of prospective borrower’s credit history
> The nature of new credit being request
>Types of credit the borrower has already used
** Note: Age, race, color, sex, religion, martial status,
employment history and salary, residential location
are NOT considered in FICO score.

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LAW AND REGULATIONS
APPLYING TO CONSUMER LOANS

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Law and regulations
• Disclosure rules: mandate telling the

consumer about the cost and other terms
of loans or lease agreement
• Anti-discriminant law: Prevent categorizing
loan customers according to their age,
sex, race or other factors

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Customer Disclosure Requirements
1. Truth in Lending Act
2. Fair Credit Reporting Act
3. Fair Credit Billing Act
4. Fair credit charge- card disclosure Act
5. Fair Debt Collection Practices Act

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Truth-in-Lending Informed use of credit among consumers by
Act requiring full disclosure of credit terms and costs.
Authorizes individuals to review their credit files
Fair Credit for accuracy and to demand an investigation and
Reporting Act correction of any inaccuracies.
Dispute billing errors with a merchant or credit

Fair Credit Billing card company and receive a prompt investigation
Act of billing disputes
Fair Credit and Customers applying for credit cards be given early
Charge-Card written notice about required fees to open or
Disclosure Act renew a credit account
Fair Debt Limits how far a creditor or collection agency can

Collection go in pressing that customer to pay up
Practices Act
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Outlawing Credit Discrimination
1. Equal Credit Opportunity Act
2. Community Reinvestments Act

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Prohibits lenders from asking certain
Equal credit opportunity questions of a customer, such as the
Act
borrower’s age or race
Prevent a lender from arbitrarily
Community marking out certain neighborhoods
deemed undesirable and refusing to
reinvestment Act
lend to people whose addresses place
them in the excluded area

06/27/2022 48
Quizz 2
1. The law that requires the full disclosure of credit

terms and which promotes the informed use of
credit is the _______.This law requires the bank
to report the APR of the loan, the dollar amount of
all finance charges and, where appropriate, all
fees
A. Truth in lending Act
B. Fair debt collection practices act
C. Fair credit billing act
D. Fair Credit Reporting Act
06/27/2022 49
2. The law that limits how far a creditor or
credit collection agency can go in pressing a
customer to pay a past due debt is the
______________________.It does not allow a
debt collector to "harass" a debtor.
06/27/2022 50
3.The_____________ permits consumers to
dispute billing errors with a merchant or
credit card company and receive a prompt
investigation into any billing errors
06/27/2022 51
Predatory lending and Subprime loans
(Cho vay “cắt cổ” và nợ dưới chuẩn)

06/27/2022 52
Real estate loans
• Differences between Real Estate loans

and other loans
• Factors in Evaluating Applications for real
estate loans
• Home equity lending

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Characteristics of real estate loan
• Variety in maturity (Both short and long

term)
• Among the riskiest loans banks can make
• Among the most rapidly growing lending

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Real estate loans vs others
• The average size is much larger

• The longest maturities (up to 30 years!)
• Condition and value of the property is as
important as income

06/27/2022 55
Factors of real estate loan
application
• Amount and stability of income

• The borrower’s available savings
• Track record in caring for and managing
property
• Outlook for real estate sales in local
market
• Outlook for market interest rates

06/27/2022 56
Changing environment for
consumer and real estate lending
• Population is aging rapidly -> less use of

credit.
• Deregulation has brought more lenders
into consumer credit field.
• Point-of- sales loans !!!
• Indirect loans: Through dealers

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Federal Bankruptcy code
• 2005, George W. Bush signed the

Bankruptcy Abuse Prevention and
Consumer protection Act
> Filing for bankruptcy is more expensive
and time-consuming >> Discourage
customer from taking more debt

06/27/2022 58
• Consumers must complete a credit counseling
program before becoming eligible for filing
bankruptcy and a ‘means test’ has been added.
• This test will let consumers know whether they
are eligible to file for Chapter 7 bankruptcy
(liquidation) which wipes out most debt or whether
they will have to file Chapter 13 (reorganization)
which requires them to have a court approved
repayment plan for their outstanding debt.

06/27/2022 59
PRICING CONSUMER AND REAL ESTATE LOANs:
Determining the rate of Interest and other loan terms

06/27/2022 60
Nonresidential consumer pricing loans

06/27/2022 61
Nonresidential consumer loans
• The cost-plus model:

Loan rate paid by consumer =
Lender’s cost of raising funds
+
Non-funding operating cost (Include wages/salaries of lender
personnel)
+
Risk premium for customer default
+
Risk premium for time to maturity
+
Desired profit margin
06/27/2022 62
Methods for calculating consumer
loans rates
1. Annual percentage rate (lãi suất hàng

năm)
2. Simple interest (lãi đơn)
3. The discount rate (lãi suất chiết khấu)
4. The add-on rate (cộng lãi vào vốn cho
vay)

06/27/2022 63
Annual percentage rate - APR
• Is the internal rate of return (annualized)

that equates expected total payments with
the amount of the loan.
• How fast the loan is being repaid and how
much credit the customer will actually
have use of during the life of the loan

06/27/2022 64
APR vs Interest Rate
• An interest rate, or a nominal interest rate

(Lãi suất danh nghĩa) refers only to the
interest charged on a loan, and it does not
take any other expenses into account.
• APR is the combination of the nominal
interest rate and any other costs or fees
involved in procuring the loan.
>> As a result, an APR tends to be higher
than a loan's nominal interest rate.
06/27/2022 65
Simple interest rate
• If the customer is paying off a loan

gradually >> declining loan balance >>
reduce interest payment

06/27/2022 66
Example
Suppose the customer asks for $2,000 for a

year at a simple interest rate of 12 % in
order to purchase some furniture.
Assume that the loan principal if paid off in 4
quarterly installment of $500 each.
Calculate the total payment each quarter ?

06/27/2022 67
Solution
• First quarter: $500 + $2,000 × 12%× 1/4 = $560
• Second quarter: $500 + $1500 × 12% × 1/4 =

$545
• Third quarter: $500 + $1000 × 12% × 1/4 =$530
• Fourth quarter: $500 + $500 × 12% × ¼= $515

06/27/2022 68
Discount rate method
• Requires the customer to pay interest up

front.
Example: Suppose the loan officer offers a

consumer $2.000 at 12% loan rate. The
interest is deducted from the loan principal.
What is the effective loan rate?

06/27/2022 69
Solution
• The deducted interest is: = $2.000 * 0.12 =

$240
• At T=0, the borrower received = $2.000 -
$240 = $1.760
ÞThe borrower’s effective loan rate is:
= $240/$1.760 = 13.6 %

06/27/2022 70
The add-on loan rate
• Is one of the oldest loan rate calculation

methods.
• Any interest owed is added to the principal
amount of the loan before calculating the
required installment payments.
>>-interest is added to loan balance and

payments are determined on that basis

06/27/2022 71
Example on Add-on loan rate
If the customer requests $2,000 and is

offered a 12 percent add-on interest rate and
a repayment plan of 12 equal monthly
installments.
• The total payments due will be $2,000 in
principal plus $240 in interest, or $2,240.
• Each monthly payment will be $186.67
($2,240 ÷ 12), consisting of $166.67 in loan
principal and $20 in monthly interest
06/27/2022 72
Rules of 78s
• This is a rule of thumb

• Determine how much interest income a
lender is entitled to accrue at any point in
time from a loan that is being paid out in
monthly installments
• Important when borrower pays off a loan
early >> interest charges

06/27/2022 73
Example
• Suppose a consumer requests a one-year
loan to be repaid in 12 monthly installments,
but is able to repay the loan after only nine
months.
• This customer would be entitled to receive
back as an interest rebate:
of the total finance charges on the loan.
06/27/2022 Chapter 5: Consumer loans, credit cards

06/27/2022 74
Interest rates on Home mortgage loans

06/27/2022 75
• Fixed-rate mortgages (FRMs)
• Adjustable-rate mortgage (ARMs)

06/27/2022 76
Example
1. What is the monthly payment for $50000

in 25 years mortgage loan at the FRA is
12%?
2. Assume that, after 1 year, the mortgage
loan rate rises to 13%. In this case, how
much does the monthly payment of the
customer?

06/27/2022 77
Charging the customer mortgage
points
 Are fees paid directly to the lender at closing in
exchange for a reduced interest rate.
 Require borrowers to pay an additional charge
up front called points >> Prepaid interest

06/27/2022 78
Example
• Suppose the borrower seeks a $100,000

home loan and the lender assesses the
borrower an up-front charge of two points.
>>> The extra charge is:

= $100.000 x 0.02 = $2.000

06/27/2022 79
WARM UP QUIZZ
What term in the consumer lending field does each of

the following statements describe?
a. Plastic card used to pay for goods and services
without borrowing money.
b. Loan to purchase an automobile and pay it off
monthly.
c. If you fail to pay the lender seizes your deposit.
d. Numerical rating describing likelihood of loan
repayment.
e. Loans extended to low-credit-rated borrowers.
06/27/2022 80
• a. Plastic card used to pay for goods and
services without borrowing money. – Debit card
• b. Loan to purchase an automobile and pay it off
monthly. – Installment loan
• c. If you fail to pay the lender seizes your
deposit. – Right of offset
• d. Numerical rating describing likelihood of loan
repayment – Credit score
• e. Loans extended to low-credit-rated borrowers.
– Sub prime loans
06/27/2022 81
Pricing Consumer and real Estate Loans:
A. Nonresidential Consumer Loans
1. The Cost Plus Model
2. Annual Percentage Rate
3. Simple Interest
4. The Discount Rate Method
5. The Add-On Loan Rate Method
6. Rule of 78s

B. Interest Rates on Home Mortgage Loans
1. Fixed Rated Mortgages
2. Variable Rate Mortgages
3. Charging the Customer Mortgage Points
06/27/2022 82
Chapter outlines
I. Introduction
II. Types of loans granted to individuals and families
A. Residential mortgage loans
B. Nonresidential loans
1. Installment loans
2. Non-installment loans
C. Credit card loans and revolving credit
D. New credit card regulations
E. Debit card: A partial substitute for credit cards?
1. Debit cards
2. Rapid consumer loan growth
06/27/2022 83
III. Characteristics of consumer loans
IV. Evaluating a consumer loan application
A. Character and purpose
B. Income levels
C. Deposit Balances
D. Employment and Residential stability
E. Pyramiding of Debt
F. How to qualify for a consumer loan
G. The challenge of consumer lending
06/27/2022 84
VI. Credit-Scoring consumer loan applications
A. The theory of credit scoring
B. The FICO Credit scoring system
VII. Laws and regulations
A. Customer Disclosure Requirements
1. Truth in Lending Act
2. Fair Credit Reporting Act
3. Fair Credit Billing Act
4. Fair Credit and Charge-Card Disclosure Act
5. Fair Debt Collection Practices Act
B. Outlawing Credit Discrimination
1. Equal Credit Opportunity Act
2. Community Reinvestments Act
C. Predatory lending and subprime loans

06/27/2022 85
VIII. Real Estate Loans
A.
Differences Between Real Estate Loans and
Other Loans
B.Factors in Evaluating Applications for Real
Estate Loans
C. Home Equity Lending

06/27/2022 86
BIGGGG QUIZZZ
1. A(n)_________ loan is a short- or medium-

term loan repayable in two or more
consecutive payments, usually monthly
or quarterly.
2. Household borrowings tend to be _________
__. Consumers are more concerned about
the size of the debt repayments than the
interest rate charged
06/27/2022 87
3. When a borrower receives a loan at one lending
institution to repay another it is called ________.
4. A(n)___________ is a credit-rating agency that
keeps records of borrowers' loan payment histories.
5. ___________________is the granting of loans to
weaker borrowers and charging them excessive
fees and interest rates, increasing their risk of
default

06/27/2022 88
EXERCISE
1. A customer seeks a $150,000 home

mortgage. The bank requires the customer
to pay 1 ¾ points up front. How much of the
loan is actually available to the customer?
2. A customer wants to borrow $1200 from
Edmond State Bank. Edmond State Bank has
an add-on loan with an interest rate of 12
percent and monthly payments for one
year. What are the monthly payments this
customer will need to make on this loan?
06/27/2022 89
3. A customer wants to borrow $25,000
for one year. TRC State Bank has a discount
loan with an interest rate of 15 percent. How
much of the loan will be available to the
customer?

06/27/2022 90
4. A bank customer is granted credit for a
$2,000 loan at 10% to be repaid in 12 equal
installments.
a. If the loan is a discount loan, what is the
monthly payment?
b. If the loan quoted has an add-on rate,
what are the net proceeds of the loan?

06/27/2022 91
RELAX 

06/27/2022 92
ANSWER
1.Installment
2.Interest inelastic
3.Pyramiding of debt
4.Credit bureau
5.Predatory lending
--------------
1. $147,375
2. $112 per month
3. $21,250
4a. $166.67
4b. $2000
06/27/2022 93

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Consumer Loans, Credit Cards and Real Estate Lending: Prepared By: Banking Department Faculty of Finance and Banking

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Consumer Loans, Credit cards

and Real Estate lending

Prepared by: Banking department

Chapter 5: Consumer loans, credit cards

• Types of Loans for individuals and families

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

1. Has been among the most popular financial services

• Consumer debt is one of the fastest

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

 By purposes: What the borrowed funds will be

• Residential mortgage loans

Chapter 5: Consumer loans, credit cards

• To purchase of home or to fund

Chapter 5: Consumer loans, credit cards

1. Why does bank offer floating rate?

Chapter 5: Consumer loans, credit cards

• To individuals and families

Chapter 5: Consumer loans, credit cards

• Installment: short to medium –term,

Chapter 5: Consumer loans, credit cards

• Credit cards issued by VISA, MasterCard,

Chapter 5: Consumer loans, credit cards

• Debit card (or plastic cards): that may

Chapter 5: Consumer loans, credit cards

1. The purchase of a house or a multifamily

Chapter 5: Consumer loans, credit cards

• High interest rates

Chapter 5: Consumer loans, credit cards

1. Character and purpose

Chapter 5: Consumer loans, credit cards

• Key factors: ability to pay and moral

Credit bureau: a company that gathers

• Size and stability are important.

!!! Net salary vs Gross salary

Chapter 5: Consumer loans, credit cards

• Indirect measure is daily average deposit

Chapter 5: Consumer loans, credit cards

> Where the individual draws credit at one

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

• Lenders use ‘credit scoring’ to evaluate

Chapter 5: Consumer loans, credit cards

• Discriminant models !! (Phương pháp định

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

• Credit bureau ratings

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

Chapter 5: Consumer loans, credit cards

• FICO – developed and sold by Fair Isaac

Chapter 5: Consumer loans, credit cards

• 5 different types of information (From most to least)