Podcast
Questions and Answers
What is a critical aspect of responsible lending obligations?
What is a critical aspect of responsible lending obligations?
- Making unreasonable inquiries about the customer's financial situation
- Taking reasonable steps to verify the customer's financial situation (correct)
- Ignoring the customer's relationship status
- Assuming the customer's financial situation without verification
Why is it essential to collect information about a customer's dependants?
Why is it essential to collect information about a customer's dependants?
- To assess their repayment capacity (correct)
- To verify their employment details
- To determine their relationship status
- To estimate their future earning potential
What type of income is normally considered when assessing repayment capacity?
What type of income is normally considered when assessing repayment capacity?
- Salary (correct)
- Overtime pay
- Bonuses
- Commissions
What is an example of a dependant, apart from children?
What is an example of a dependant, apart from children?
Why is a customer's employment information important in credit assessment?
Why is a customer's employment information important in credit assessment?
What is the purpose of collecting information about a customer's financial situation?
What is the purpose of collecting information about a customer's financial situation?
Why is it important to verify a customer's financial situation?
Why is it important to verify a customer's financial situation?
What is a benefit of considering a customer's employment details in credit assessment?
What is a benefit of considering a customer's employment details in credit assessment?
What is a factor that constrains the lender's negotiation of the application fee?
What is a factor that constrains the lender's negotiation of the application fee?
What can be reduced or removed by acquiring a tailored package?
What can be reduced or removed by acquiring a tailored package?
Why do banks charge higher interest rates for riskier loans?
Why do banks charge higher interest rates for riskier loans?
What is a benefit of a fixed interest rate loan?
What is a benefit of a fixed interest rate loan?
What is NOT a factor considered by banks when setting interest rates?
What is NOT a factor considered by banks when setting interest rates?
What type of fees are usually associated with loan increases or switches?
What type of fees are usually associated with loan increases or switches?
What is the relationship between risk and interest rates in lending?
What is the relationship between risk and interest rates in lending?
What is the purpose of a tailored package offered by banks and financial institutions?
What is the purpose of a tailored package offered by banks and financial institutions?
What is the term used to describe the difference between a customer's total assets and total liabilities?
What is the term used to describe the difference between a customer's total assets and total liabilities?
What is the primary purpose of conducting a credit assessment?
What is the primary purpose of conducting a credit assessment?
What type of asset is relatively easy to value and realize?
What type of asset is relatively easy to value and realize?
Why is it essential to exercise care when relying on customer assets?
Why is it essential to exercise care when relying on customer assets?
What is the purpose of applying contingency allowances when adopting valuations?
What is the purpose of applying contingency allowances when adopting valuations?
What is a critical factor to consider when evaluating a customer's asset, such as an original painting?
What is a critical factor to consider when evaluating a customer's asset, such as an original painting?
What is the relationship between a customer's assets and liabilities, and their net position?
What is the relationship between a customer's assets and liabilities, and their net position?
What type of information would be useful to have about a customer's assets and liabilities when making a lending decision?
What type of information would be useful to have about a customer's assets and liabilities when making a lending decision?
What is the primary factor that determines the rate of interest charged by a bank to a customer?
What is the primary factor that determines the rate of interest charged by a bank to a customer?
What is the purpose of a customer providing security to a lender?
What is the purpose of a customer providing security to a lender?
Why is it important for banks to justify their interest rates?
Why is it important for banks to justify their interest rates?
What is the typical outcome when a bank charges different interest rates for similar types of borrowing?
What is the typical outcome when a bank charges different interest rates for similar types of borrowing?
What guides bank staff when deciding on interest rates to charge customers?
What guides bank staff when deciding on interest rates to charge customers?
What is the primary reason banks compare risk to return when deciding on interest rates?
What is the primary reason banks compare risk to return when deciding on interest rates?
What is the primary benefit of offering suitable and adequate security to a lender?
What is the primary benefit of offering suitable and adequate security to a lender?
What is the outcome when a bank's interest rate is influenced by the customer's previous borrowing record?
What is the outcome when a bank's interest rate is influenced by the customer's previous borrowing record?
What is the primary source of revenue for a bank?
What is the primary source of revenue for a bank?
What is the primary goal of a bank when lending?
What is the primary goal of a bank when lending?
What opportunity arises from assisting customers with a mortgage?
What opportunity arises from assisting customers with a mortgage?
What is a result of the increased range of bank lending products?
What is a result of the increased range of bank lending products?
What is a key consideration when assessing a loan application?
What is a key consideration when assessing a loan application?
Why do banks lend money?
Why do banks lend money?
What is a benefit of identifying additional customer needs?
What is a benefit of identifying additional customer needs?
What is the result of considering the person, amount, purpose, and term of the loan?
What is the result of considering the person, amount, purpose, and term of the loan?
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Study Notes
Principles of Lending – Part 1
- The basic functions of banks are to accept deposits and lend money, with lending being the primary source of revenue for banks.
- Lending enables banks to pay interest to providers of capital, meet costs, discharge taxation obligations, and make a profit.
- Lending also identifies opportunities for banks to generate revenues from additional sources, such as through assisting customers with mortgages and identifying further needs.
Key Principles of Lending
- Consider the person applying for the loan, including their relationship status and dependants, as these can affect their ability to repay the loan.
- Collect information on employment, including regular salary and bonuses, as this directly affects income and repayment capacity.
- Collect information on assets and liabilities to determine the customer's net position and overall financial situation.
Assets and Liabilities
- Assets - liabilities = net worth.
- Assets can include bank accounts, original paintings, and other items, but care should be exercised when placing a value on these assets.
- Liabilities should be considered in detail, including income and expenditure, to inform the lending decision.
Security
- Knowing the type of security required is critical to approving the loan.
- Some types of security are more valuable to the lender than others.
- Banks have defined policies on acceptable types of security and contingency allowances.
Fees
- Application fees can be negotiated between the lender and customer.
- Upfront fees may include valuation fees and transaction costs.
- Ongoing fees can be reduced or removed with tailored packages, subject to terms and conditions.
Interest
- Banks decide on interest rates by comparing risk to return.
- The more risk involved for the bank, the higher the interest rate charged.
- Factors affecting interest rates include competition, operating expenses, cash rates, and domestic and international economic conditions.
- Providing security can mitigate risk and result in a lower interest rate.
- Banks must justify the rate of interest charged and apply a consistent approach to all customers.
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