The Lending Game: Part 1

I’ve been asked to talk a little about the ins and outs of lending, so I’m thinking this is a good time to introduce the topic. There are many different types of loans available to consumers and sometimes it’s tough to know which one is the right fit. However, this particular post is only going to cover consumer loans, so if you’re looking for business loan information that’s another post for another day. I’m also not going to talk about mortgages or home equities within this post because they’re just too comprehensive to include with everything else that we’re talking about.

So, that leaves us with the following:

Personal Loans

Personal loans include everything from unsecured loans and lines of credit (LOC) to secured loans and LOC’s. Secured loans and LOC’s are guaranteed by cash, i.e. money in savings or a CD. The interest rates on an unsecured typically range anywhere from 9-17%, but this varies from institution to institution. Secured loans are different from banks to credit unions. Banks typically charge the same interest rate as unsecured, but it’s much easier to actually be approved when there is collateral. Credit Unions will almost always approve a secured loan and their rates are usually 2-3% over what the savings or CD is paying. So, if you have a CD secured loan and your CD is paying 4% interest, then the loan would be 6-7%.

Stock Secured Loans

These types of loans allow an individual to use certain stocks they hold as collateral for a loan. However, since stocks can lose value, most institutions only allow a certain percentage of the value to be borrowed against. For instance, my credit union will only accept IBM stocks (the owner must physically hold a piece of paper in order to use them as collateral) and they will not exceed 70% of the value of the stocks. I’ve seen rates start as low as 6% for these.

Automobile Loans

These include purchasing a new or used vehicle, as well as, using a vehicle owned free and clear as collateral for a loan. Interest rates vary and there’s a lot of competition in this market. Sometimes you can find lower rates and specials with a dealership and sometimes it makes more sense to use a bank or credit union. Current bank and credit union rates are about 5-20% depending on things like your credit score and history, and whether the vehicle is new or used.

Boat/RV/Trailer/Motorcycle/Classic Cars

These are probably some of the more complicated loans simply because there is a good deal of paperwork involved, especially boat loans and especially if you’re buying out of state. Again, there will be a difference in rates from dealerships to banks and credit unions. The rates for these types of loans are about the same as auto loans, but they’re separate because they involve more work.

Education Loans

Some institutions offer this and some don’t. If you’re looking for student loans, you’ll want to see if your bank or credit union has a specialist or a specific group they deal with. A lot of times the institutions don’t physically offer the loans in the same way they do other loans, but they have a partnership with a company that does offer them. The funds still technically come from the bank or credit union, but the managing and processing is done through the partnering company. To be honest, I’m not entirely sure what the rates for education loans are these days, so the expert at your local institution would be the person to ask.

So, What’s The Process?

The next step is to fill out an application. Remember, by law a bank or credit union can not discriminate or discourage you from applying for the loan, so if you feel like they are, it’s an issue you will want to address with the manager.

Once the application is submitted, one of two things will happen. Either the application is ‘decisioned’ by the individual who took your information, or it is sent to an underwriter who can review and decision it. Nine times out of ten, you will find that loans are sent off to underwriters rather than being decisioned on the spot. It used to be that loan officers were trained underwriters and were given the authority to makes those decisions; however, that is not always the case anymore.

Most banks no longer allow their loan officers to make those decisions. There is an underwriting group located somewhere within one of the branches of the bank. Many credit unions have an underwriting group for certain things, but loan officers are usually more empowered to make decisions. The reason for the separation of loan officers and underwriters was to avoid discrimination. An underwriter who is unbiased and away from the situation will make a decision based on facts - the applicant’s credit history, repayment history, credit score, their relationship with the institution, etc. A loan officer in front of the customer or member has potential influences that could sway their decision.

What are they looking for?

This largely depends on the institution that you choose. One thing you need to know up front is that banks are more stringent with their lending guidelines than credit unions. Banks want to see good credit history and rely a lot on past performance and credit score. Ever wonder if there’s a magic cut-off number? There is. Most banks won’t consider you for a loan if you have a score below 620. There are always exceptions to the rule, but this is generally the number they stick to.

Credit unions don’t have the same guidelines as banks. It’s all about the relationship with the credit union. How long have you had your accounts there? What has your repayment history been with them? In some cases, you can have poor repayment history with others, but if you’ve always paid your bills on time with the credit union, they’ll approve a loan for you. There usually isn’t a magic number for credit unions because the goal is to take care of their members as best they can; however, even credit unions have to turn down loans on occasion.

Some things that both banks and credit unions look at when making their decision include:

•    Credit Report
•    Credit Score
•    Relationship
•    Repayment History
•    Employment History
•    Income
•    Residential History
•    Loan-to-Value (LTV)

They want to see stability and they want to make sure that you have a reasonable ratio of money coming in versus what’s going out (that’s what is meant by LTV). While most banks and credit unions want to help their customers when they can, they don’t want to overextend the customer’s resources. Number one, it isn’t the right thing to do; and number two, it makes the loan much more risky. Banks and credit unions want to get their money back, so there is some risk assessment associated with loan decisioning.

Keep an eye out for part two as I’ll talk a little bit more on how to read your credit report and the things banks and credit unions look at on the credit report when deciding whether to approve your loans.

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Related Posts:

Person-to-Person Online Lending

The Lending Game: Part 2

7 Zany Ways to Stop Overspending

Teach your Children about Finances Part - II

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