Principles of Lending Quiz

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Questions and Answers

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?

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?

Salary (correct)

Overtime pay

Bonuses

Commissions

What is an example of a dependant, apart from children?

Elderly parents Signup and view all the answers

Why is a customer's employment information important in credit assessment?

It directly affects their income Signup and view all the answers

What is the purpose of collecting information about a customer's financial situation?

To assess their repayment capacity Signup and view all the answers

Why is it important to verify a customer's financial situation?

To take reasonable steps to ensure responsible lending Signup and view all the answers

What is a benefit of considering a customer's employment details in credit assessment?

It affects their income, which directly impacts their repayment capacity Signup and view all the answers

What is a factor that constrains the lender's negotiation of the application fee?

Valuation fees and transaction costs Signup and view all the answers

What can be reduced or removed by acquiring a tailored package?

Ongoing fees Signup and view all the answers

Why do banks charge higher interest rates for riskier loans?

To compensate for potential losses Signup and view all the answers

What is a benefit of a fixed interest rate loan?

The interest rate remains the same for the duration of the loan Signup and view all the answers

What is NOT a factor considered by banks when setting interest rates?

Valuation fees Signup and view all the answers

What type of fees are usually associated with loan increases or switches?

Switching fees Signup and view all the answers

What is the relationship between risk and interest rates in lending?

Higher risk, higher interest rate Signup and view all the answers

What is the purpose of a tailored package offered by banks and financial institutions?

To reduce or remove certain fees Signup and view all the answers

What is the term used to describe the difference between a customer's total assets and total liabilities?

Net position Signup and view all the answers

What is the primary purpose of conducting a credit assessment?

To make an informed decision on the customer's loan request Signup and view all the answers

What type of asset is relatively easy to value and realize?

Bank account Signup and view all the answers

Why is it essential to exercise care when relying on customer assets?

Because the assets may be difficult to value and realize Signup and view all the answers

What is the purpose of applying contingency allowances when adopting valuations?

To account for potential devaluation of the asset Signup and view all the answers

What is a critical factor to consider when evaluating a customer's asset, such as an original painting?

The time it may take to find a suitable buyer Signup and view all the answers

What is the relationship between a customer's assets and liabilities, and their net position?

Assets - liabilities = net position Signup and view all the answers

What type of information would be useful to have about a customer's assets and liabilities when making a lending decision?

The customer's income and expenditure Signup and view all the answers

What is the primary factor that determines the rate of interest charged by a bank to a customer?

The level of risk involved for the lender Signup and view all the answers

What is the purpose of a customer providing security to a lender?

To reduce the risk involved for the lender Signup and view all the answers

Why is it important for banks to justify their interest rates?

To avoid damage to their reputation Signup and view all the answers

What is the typical outcome when a bank charges different interest rates for similar types of borrowing?

An adverse effect on the bank's reputation Signup and view all the answers

What guides bank staff when deciding on interest rates to charge customers?

Internal guidelines Signup and view all the answers

What is the primary reason banks compare risk to return when deciding on interest rates?

To compensate for potential losses Signup and view all the answers

What is the primary benefit of offering suitable and adequate security to a lender?

A lower interest rate Signup and view all the answers

What is the outcome when a bank's interest rate is influenced by the customer's previous borrowing record?

A higher interest rate is charged Signup and view all the answers

What is the primary source of revenue for a bank?

Lending money Signup and view all the answers

What is the primary goal of a bank when lending?

To make a profit Signup and view all the answers

What opportunity arises from assisting customers with a mortgage?

Identifying opportunities for additional revenue streams Signup and view all the answers

What is a result of the increased range of bank lending products?

More complex lending situations Signup and view all the answers

What is a key consideration when assessing a loan application?

The person, amount, purpose, and term of the loan Signup and view all the answers

Why do banks lend money?

To meet their costs and make a profit Signup and view all the answers

What is a benefit of identifying additional customer needs?

Achieving greater customer loyalty and revenue streams Signup and view all the answers

What is the result of considering the person, amount, purpose, and term of the loan?

Making a professional and ethical lending decision Signup and view all the answers

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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Description

Test your knowledge on the principles of lending, including security, lending rates, and national credit code. This quiz covers the key concepts for professional and ethical lending practices.