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Posts Tagged ‘bank loan’

Owner of my own Risk – Me or others ?

In Banking, Finance, Insurance, Risk Management on February 25, 2013 at 8:11 am

When an individual see the Risk – it looks 4 letter words. It is well said “This will not happen to me”, it is unusual not to avoid it. Actually what is the risk? It is a threat, loss of opportunity, unexpected happening of loss. Who is the owner of the risk – individuals themselves? It is the duty of risk owner is to prevent, reduce, transfer and control the risk.

 

It is just a Four letter word – RISK

Corporates also own the risk; risk manager owns the risk of each department. He/she may set procedures/systems to prevent/reduce the risk, he may transfer the risk to the insurance companies. Insurance companies owns the risk of various corporates and individuals but here the system works little different. Although insurance companies manage the risk however the risk lies in the hands of insured, It is also in the hand of GOD which can be seen any time in floods, earthquake. Its invisible based on set of calculations and predictions.

These insurance companies retain certain part of the risk in their hand and transfer the risk to the Reinsurance companies. Now situation changes dramatically – Reinsurance companies accepts the risk of same individuals/corporates from Insurance companies without knowing who actually they are, only based on set of terms and conditions and documentation submitted by insurance companies. The ownership of the risk is still in the hands of insured.

The reinsurance companies transfers this risk to Retrocession companies who practically don’t know the country of origin of the insured at the time of acceptance of risk, only a set of group risk based on certain conditions are accepted. The ownership does not change hands, insured still can increase or reduce own risk. Finally the set of risk reached through derivative market eg; CAT bond to the public. Individual own their own risk. “its better not to avoid risk rather deal with that”

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What are the factors which affect the buyer to take loan?

In Banking, Finance on June 22, 2012 at 12:56 am

This is the third blog in the series – do read earlier ones Understanding Types of Loan and How Banks Categorized Whom to Give Loan .

In this blog, I will talk about the factors which affect the buyer while he is about to take the loan.

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The first and foremost step in taking a loan is to understand the purpose of loan e.g.: home loan or student loan.  Then think about most suitable loan for the purpose for example should we take home loan by making payment through credit card – it will look most unsuitable method as home loan is long term loan and credit card payment is made after a very short period of time. Then the loan should be according to your income level eg: how much you are in actual capacity to pay monthly for such loans. It should be rather the amount which you are in position to pay with very comfort every month. Then you need to make it adjusted with your future planning eg: repayment in 6 months or 6 years. The next important step would be to take decision on fee and interest you would like to pay under the loan (eg:  Personal loans have high fee and interest rates than home loan). In the last, you need to take information from many banks or financial institution to get the best interest rates and fees. The bank policies for repayment and other conditions also need to be considered.

In short, the major factors which affect the borrower’s decision are purpose of loan, type of loan which is suitable according to purpose of loan, repayment time period of the loan, actual capacity to pay the loan according to income level, adjusted loan according to future planning, fee and interest rates offered by the different banks.

How banks categorize whom to give loan?

In Banking, Finance on June 7, 2012 at 10:57 pm

In continuation of my earlier blog Understanding Types of Loan ……..

Now days, most of the banks use their own software to rate and assess the risk of its clients (people, group or corporates).This you can see by some professional working in top IT companies and working in senior management get loans very easily than person with same qualification working under a small company. Why this is so – it is due to his better credibility and stability to repay the loan.

Income level and the employment history are the major factors which affects the loans. However, the bank considers the major questions and rate or give a score according to its appropriateness.

I.         Do you make payments on time?  They check the borrower’s payment history through scrutinizing their credit card details, car payments, mortgages, student loans or other types of loan. ( such as bank gives 35% score to the perfect borrower under this category)

II.         How many other loans have been taken and its balance remaining?  They check about how many other loans like home loan, car loan etc. borrower has already taken and what is the balance remaining and link it to the borrower’s annual income. ( for example: bank gives 30% score to the perfect borrower under this category)

III.         From how many years you have opened these accounts and usage? They check the borrower’s credibility in case of payment e.g. a fresher who has applied for credit card usually get very low credit limit on his credit card than a professional working from 10 year with good bank records. ( for example: bank gives 10% score to the perfect borrower under this category)

IV.         How often you have applied for loan? They check whether you are not taking many loans at one time such as once you have taken home loan, for a year or so, you will be denied to take car loan. ( for example: bank gives 10% score to the perfect borrower under this category)

V.         How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? ( for example: bank gives 10% score to the perfect borrower under this category)

The higher the score, higher the chances of getting the loan. Each and every bank has its own risk assessment method and risk scoring that’s why different bank gives same loans at different rates to same borrower. Till now, we have considered, the bank or financial institutions factors which affect the loans.  See my next blogs on factors affects borrower’s decision to take loan from a bank or institution.