Getting a Loan

How To Successfully Qualify For A Bank Loan?

Before applying for any kind of loan, it is prudent to analyze just how much money you need and precisely how long you need it for. Then compare the rates and conditions you will have to abide by for the use of someone else’s cash.

Financial institutions offer many types of loans under many different names. In addition to auto loans and home mortgages, there are, for example, home improvement loans, used for financing repairs, remodeling, additions or other improvements to a house; small business loans, made to individuals who own their own companies to finance operations or buy new equipment; special short-term loans for a variety of purposes; “demand loans” or “time notes” that can be used to tide a person over a number of months or until a specified date when expected funds will have come in and the loan can be paid in full; “swing” or “bridge” loans to enable a house buyer to close on the contract for a new home while waiting for the money due on the purchase of his or her old one.

In all loans — particularly the most common ones, “consumer” or “personal” loans that are ordinarily paid back in monthly installments — bankers are mainly interested in two things: the purpose of the loan and the borrower’s ability to repay it. They are usually less willing to lend $5,000 for an extended vacation in Europe than to lend the same amount for the payment of medical bills or the installation of a brand new heating system for the home.

As a practical matter, a loan officer may have a hard time knowing what the money actually went for; your ability to repay is the primary concern. Though the figures vary, most banks do not like to lend you a sum that exceeds 20 or 25 percent of your gross income — $6,000 to $7,500 on a salary of $30,000, for example — or an amount that would make your total monthly payments larger than a week’s salary, including your debts (and in the case of mortgages, including payments towards taxes and insurance on your home). But, again, banks don’t make a fetish of verifying people’s stated incomes. They are likely to pursue the matter in detail only if the loan is for a large amount and the collateral or security interest is inadequate or shaky. Moreover, if they have any misgivings about you, they can scrutinize your credit history to see how well you have handled credit in the past.

How Good Is Your Credit Rating?

The Three C?s Of?Your Credit Rating

In the days before computers and credit cards, loan officers usually sized up applicants on the Three C’s of Credit:

  • Character (a moral commitment to pay the money back),
  • Capacity (the means to do so) and
  • Collateral (property that could be seized and resold in the event repayment was not made).

The Three C’s are still important in securing loans, but creditors today are more apt to rely primarily on computer models and statistical graphs that rate by points the typical characteristics of people who do, and don’t, repay their debts.

According to a California firm that develops such systems for banks and other creditors, only about 20 to 30 percent of all credit applicants get enough points to be approved. While each institution has its own system, Consumers Union, publisher of the magazine Consumer Reports, analyzed some common denominators and came up with the hypothetical scoring test shown below.

Generally, the older you are the better credit risk you are in a lender’s eyes. The points, however, drop noticeably for people in their mid-30’s, a group that often faces the unforeseen expenses of young children, divorce or other causes of financial stress.

The longer you have lived in one place the more lenders see you as a “stable” person, and if you own rather than rent your home, you score extra points. People with cars rate higher than those without, and the newer the car the more points you are apt to get.

Another consideration is how long you have held the same job. What kind of job you have — an executive rates higher than a cab driver — and your income, of course, make a difference.

Having a savings account is better than having a checking account, and you are considerably more desirable if you have both. If you have taken out an installment loan from your bank, and are repaying promptly, you will get a few more points.

People who already have one or more credit cards in good standing are considered better risks than those with none. Department store charge cards, travel and entertainment cards and oil company cards rate somewhat lower, and off-the-cuff credit with, for instance, the local drug store, which is not punched into a national credit-reporting system, ranks even lower than that.

If you have been desperate enough to have borrowed recently at high interest from a small-loan or finance company, you will probably be docked a number of points. If you have applied and been turned down for credit more than once in the last six months, and that fact appears on your computerized record with a credit-reporting agency, you may have difficulty getting new credit, as you may if your record indicates that you have not been prompt in paying your bills.

If you have gone through bankruptcy in the last few years, you may have to forget credit completely, unless you have solid evidence that you are back on your financial feet.

Read here How to Calculate Your Credit Rating?

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How To Calculate Your Credit Rating?

Credit Rating Test

The “test” given here can indicate only your relative credit-worthiness. It cannot tell you whether you will actually get credit from particular lenders, whose policies may vary widely according to their experiences, profit targets and tolerance of risk under different economic conditions at different times. One lender, for example, might sign you up if you scored a total of 75 or more points, while another might approve you only if you exceeded 125 points.

Before applying for credit, especially a major loan, it is a good idea to see for yourself just what your credit history is. You have the right under law to ask the lender for the name of the credit reporting agency the institution uses, and to obtain a copy of your record from that agency so you can weigh your chances, correct any errors or append your side of the story. Then discuss your prospects with an officer of the institution where you hope to get a loan.

Be leery of outside organizations that claim they can help you get credit or “fix” your credit report. For a fee, often a substantial one, such operators usually just tell yon what your rights are in investigating and amending your report — something you can do yourself at little cost.

A Hypothetical Credit-Scoring Scheme

1. What is your age?
Under 25 (8) 25-29(12) 30-34(10) 35-39(6) 40-44(14) 45-49(18) 50 or more (25)
2. How many years have you lived at your current address?
Less than 1 (-10) 1-2 (-3) 2-3(0) 3-5(4) 5-9(14) 10 or more (26)
3. Do you own your home or do you rent?
Own (30) Rent (-32) Other (0)
4. How many years have you held your current job?
Less than 1 1/2 (-14) 11/2-3(0) 3-6(5) 6-8(9) 9 or more (16)
5. What bank accounts do you have?
Checking & Savings (24) Savings only (11) Checking only (6) Neither (0)
6. Do you have a current bank loan?
Yes (3) No(0)
7. Do you have a phone?
Yes (9) No(0)
8. How many bank and travel-entertainment cards do you have?
0(0) 1(12) 2 or more (21)
9. How many major department-store credit cards do you have?
0(0) 1-2(5) 3 or more (8)
10. How many loans from a small-loan company do you have?
0(0) l(-4) 2 or more(-12)
11. How many marginal credit references would you have to use?
0(0) l or more (-6)
12. What is your family income?
0-$10,000(-7) $10,000-15,000(0) $15,000-19,000(5) $19,000-25,000(8) $25,000 or more (13)

Total

1 Do not include loans from automobile-finance companies such as GMAC.

2 In filling out an application form, a certain number of credit references are required.

If you have to use small stores without an organized credit-reporting system, you’ll lose points.

Scorecard

If you scored

You’d be in the top

Your bad-debt ratio

If you scored

You’d be in the top

Your bad-debt ratio

151to l75

3%

0.4%

26 to 50

67%

11.0%

126 to 150

8%

1.0%

to 25

84%

14.7%

101to 125

16%

2.5%

-24 to 0

93%

19.2%

76 to 100

28%

5.1%

-49 to -25

98%

22.7%

51 to 75

46%

8.0%

-75 to -50

100%

29.1%

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Debit Cards

What Is A Debit Card?

Debit cards are less common than credit cards, but?an increasing number of banks and savings institutions offer them now. You can use debit cards like credit cards in making purchases. However, unlike credit cards, which bill you later for the amount you have been charged, debit cards transfer your money immediately and directly out of your account with the bank.

With a debit card you can draw on a checking account, a savings account, and, with some, a personal line of credit extended by the bank as an overdraft privilege — you can even draw from a predetermined loan that is secured by your home or other property as collateral.

Debit cards are being used more and more in such places as department stores and supermarkets. Instead of having to cash a check with the manager’s approval, or using the store’s own charge card, a clerk inserts your debit card in a point-of-sale terminal and types in the information, and the amount is immediately deducted from your account at the bank.

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Credit Cards

What Is A Bank Credit Card?

Credit cards, whether issued by banks or other institutions, are another form of revolving credit. These cards entitle their holders to a predetermined maximum against which they may borrow, and the principal repaid is automatically restored to the credit line.

You can use a credit card to pay for goods and services from participating stores, restaurants, airlines and the like and can also borrow cash against it. Interest rates on bank-card purchases tend to be high, and the rates for cash advances even higher. Business institutions that accept credit cards pay a fee to the issuer — the bank, for example — to help defray the cost of credit card transactions, while on a cash advance the customer must bear the entire cost.

Thousands of banks around the country offer major credit cards and until recently, most of them were issued without charge. Many customers made use of their cards to purchase goods and services and then, by paying in full during the first billing period, avoided all interest charges. In effect, these people were taking out short-term, interest-free loans.

As this practice defeated the banks’ purpose in issuing credit cards — to encourage purchases on credit so that the bank could earn interest — many institutions began charging membership fees of $15, $20 or more a year for the use of their cards. Some banks have waived fees in order to attract new customers, and others offer cards free of charge to those who maintain accounts with the bank. Because the interest rates on credit card purchases may vary from one institution to another, it is a good idea to check with a number of banks before deciding to sign up for a credit card.

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Bank Loans

Types of Bank Loans

Bank credit for consumers falls into two general categories, closed-ended and open-ended. A mortgage, for example, is considered a closed-ended loan because it is for a specific amount and must be paid off over a specified period. A bank credit card provides an open-ended loan: it gives the cardholder a specific amount of credit against which he or she may draw in making purchases.

Installment Loans

These are closed-ended credit agreements. The borrower receives a certain amount of money and agrees to repay it over a stated period, usually month by month, at a predetermined rate of interest that will neither rise nor fall during the period of the loan. Because the loan is amortized, the borrower has the full use of the funds only for the first month.

The interest charged on installment loans varies from bank to bank and with the purpose for which the loan is to be used, so consumers should shop around for the lowest rate. Higher rates are usually charged for personal loans that have no particular purpose specified and that are “unsecured” — i.e. have no collateral in the form of property, such as an automobile or a boat, that the bank can take over in case of default. In contrast, a loan that is specifically written for the purchase of an automobile, in which the car itself serves as the security or collateral, can usually be obtained at a point or two lower interest. The lowest rates of all are generally offered on government-subsidized loans, such as those taken out by students for their college or postgraduate education.

Lines of Credit

These are open-ended loans, often given names like “Credit-Line Checking.” Whatever they are called, the bank provides the customer with a stated amount of credit that may be called upon, in whole or in part, at any time. Most loans of this type are linked to the customer’s checking account. To use the credit the customer writes a check. If there are insufficient funds to cover the withdrawal, funds from the credit line are automatically transferred to the checking account. If you use a line of credit, you are billed each month for the credit you have used and are required to make payments monthly against the principal and accrued interest charges. As the principal is reduced by a given amount, that amount is restored to your credit line. The interest on this “revolving credit” is usually higher than the interest on installment loans, but you can often arrange with the bank to have a specific sum taken from your checking or savings account each month to pay off the obligation.

Passbook Loans

The least expensive form of credit available at banks is usually a passbook loan which uses the borrower’s savings at a bank as collateral. Most passbook loans are written as installment loans and specify a repayment schedule.

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EFT Errors Settlement

Electronic Fund Transfer Errors Settlement

If you suspect that an error has been made in an electronic transfer of funds, call your bank immediately. The law requires that you make the call within 60 days, but the sooner you give notice the easier it will be to correct any error. Unless the bank asks you to, you need not follow your call with a written description of the error, although it is good practice to do so, since it will provide you with evidence that you notifed the bank. Include your name and account number, the date of the error and a description of the discrepancy. The bank is required to investigate and resolve the problem within 45 days of receipt of your notification. If, however, the bank has not completed its investigation within 10 days, it must provisionally credit your account for the amount you claimed you lost through the error, plus the interest on that amount.

If the bank discovers that your claim is correct, the credit must be made permanent. If the bank disputes your charges, it must inform you of this fact and, at your request, provide you with the documents it used to reach this conclusion.

If you are unable to reach an agreement with the bank, you may take your case to: Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.

If your specific complaint falls outside the jurisdiction of the Federal Reserve, it will direct you to a state body that can help.

Your state banking commission is another source of assistance, as is your state attorney general’s office. Should all else fail, you have the right to go to court and sue the bank for relief.

If your EFT card is lost or stolen and someone else uses it, your liability is limited to $50. But this limitation applies only if you notify the bank within two business days after discovering the loss. If you wait more than two days, your liability may be as much as $500, and if you fail to notify the bank of any unauthorized transfers that appear on your statement within 60 days of the date the statement was sent to you, you could lose everything that was taken.

Since your EFT card can be used by an unauthorized person only if he or she also knows your personal identification number, do not carry a notation of your number in your wallet or handbag, but memorize it instead.

See also Electronic Fund Transfers and Your Rights as an EFT Customer

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Your Rights as an EFT Customer

EFT Customer?s Rights

Like anything else, electronic fund transfers are subject to error. A malfunction in a computer or a mistake by a programmer could, for example, transfer $1,000 from your account to the account of your utility company when in fact your bill was $100. If you lose your automatic teller card and it is found by someone who discovers your personal identification number, that person is in a position to empty your account. To protect bank customers and banks alike, Congress passed the Electronic Fund Transfer Act, which is implemented through Regulation E of the Federal Reserve Board. Following are your rights as an EFT customer.

Statement of Terms. When you open an account with an EFT feature, you are entitled to receive a statement listing all of the terms and liabilities associated with the account.

Receipt. Both automatic teller machines and point of sale terminals must provide you with receipts of all transactions. A receipt includes information on the amount of money transferred, the date of the transfer, the type of account from which the money was withdrawn or in which it was deposited, the name of any financial institution or other party to which funds were transferred and the number of the encoded card that was used to make the transfer.

The monthly statement you receive from the bank must also list all transfers, giving their amounts and dates, including information on preauthorized transfers and those made via telephone. The statement must include the names of the holders of accounts to which you made EFT payments and show all bank fees involved, as well as your balances during the period covered. In addition, it must specify the name and address of the person to whom inquiries are to be directed.

Remember that electronic fund transfers, unlike checks, are recorded immediately and thus should be noted immediately in your deposit and withdrawal records. For example, if you make a POS payment from your checking account directly to a merchant’s, you must have the money available in your account if you are not to be charged for an overdraft.

On the other hand, if you have authorized an EFT transaction in advance, you can stop it, either by oral or written notice, provided you act at least three days before the transfer is scheduled to take place.

If a bank fails to make an EFT transfer when it has been authorized to do so and when the depositor has sufficient funds to cover the transfer; or if it fails to stop payment when it has been properly instructed to do so, it may be held liable for any damages caused to the depositor.

See also Electronic Fund Transfers and EFT Errors Settlement

Electronic Fund Transfers

Electronic Fund Transfers (EFT)

By now, most depositors have some familiarity with the machines in bank lobbies that enable customers to make withdrawals from, or deposits to, savings and checking accounts without the aid of a human teller. But such machines are only one aspect of electronic fund transfers. An increasing number of other transactions are also being handled by computers. Here are descriptions of a few of the electronic services available in a number of banks.

Preauthorized Payments

One of the relatively new forms of electronic banking is the preauthorized payment, in which money is automatically deposited or withdrawn from an individual’s savings or checking account. For example, an employer who is authorized by an employee to do so, may place the employee’s paycheck in his or her account through an electronic fund transfer. Some major companies deposit a single payroll check (actually a computer tape authorizing payment) for all their employees who are patrons of a particular bank. The bank’s computer has already been programmed to divide the payment according to each employee’s salary. A more sophisticated method now coming into use is for the employer to route the total payroll tape to a regional automated clearinghouse, where a computer not only divides the tape into individual payment orders but dispatches these orders — again via computer — to all of the participating banks in the area in which the employees have accounts. Other regular payments, such as Social Security checks or dividend checks, can be, and often are, deposited electronically via automated clearinghouses.

Similarly, an account holder may authorize the bank to transfer money electronically from his or her checking account on a certain day each month to pay the mortgage, the telephone bill and other regular expenses.

Point of Sale Terminals (POS)

These are electronic fund transfer machines located in shopping centers and department stores. Instead of paying for a purchase with a check or cash, or charging it to a credit card, a bank depositor can activate the POS terminal and transfer funds electronically from his or her account to that of the merchant. This is one of the newest forms of electronic fund transfers, but it will probably be some years before the service is available on a nationwide basis.

See also Your Rights as an EFT Customer and EFT Errors Settlement

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Super-NOW Bank Accounts

Super Negotiable Order of Withdrawal Accounts

Scarcely had the federal government authorized banks to offer money market savings accounts than it also granted them permission to introduce checking accounts that pay money market interest rates — accounts known as “Super-NOW’s.”

Depending on the policy of the individual bank, Super-NOW accounts may offer all of the features of regular NOW accounts, including free check-writing privileges and no service fees as long as a minimum balance is maintained. If you are to earn money market rates, you must maintain the legal minimum of $2,500 in your Super-NOW account. If you are to benefit from free check-writing privileges, the bank will generally require you to maintain the same balance as is required for a regular NOW account.

The interest paid on Super-NOW accounts usually varies from day to day, but in general is a point or so below that paid on money market savings accounts. Should a Super-NOW account fall below the $2,500 minimum, most banks will continue to pay interest, though it will be reduced to the rate paid on regular NOW accounts.

While a Super-NOW pays slightly lower interest, its major advantage over a money market savings account is that it offers unlimited checking privileges. One banker has gone so far as to say that with these new high-yield accounts there is no reason for anyone with $2,500 ever to maintain a passbook or an ordinary checking account. Indeed, it is quite possible that the minimum deposit for Super-NOW’s, as well as money market savings accounts, will be reduced in the near future.