Example of HD loan evaluation PDF

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Finance Discipline Group UTS Business School ASSIGNMENT SUBMISSION SHEET – Hard Copy Subject Name: Commercial Bank Management Subject No.: 25574 Loan Application File Number ________________________ 1. Name: _______________________________ 2. Student No.: ________________________

Declaration I have carefully read, understood, and have taken into account all the requirements and guidelines for this assignment and referencing in the subject outline. I affirm that this assignment is my own work; that it has not been previously submitted for assessment; that all material which is quoted is accurately indicated as such; and that I have acknowledged all sources used fully and accurately according to requirements. I am fully aware that failure to comply with these requirements is a form of cheating and could result in disciplinary action.

Signature(s)/ Date: ..................................................................................................................................

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Loan Application Answer Sheet – File Number XXX Customer #1 Qtas, Ben Customer number and Name #1 Qtas, Ben Loan Amount

Age 32

Other Bank’s Credit Score Good

Student Bank Credit Ranking Sub-prime Customer

Reason for loan

Deposit amount and % of purchase price $54,000 Buy new car for $80,000 less trade in of Deposit: $27,000 (trade-in) $27,000 % of purchase price: 33.75% Loan Term Loan rate % pa Monthly Existing loan payments and repayment remaining rental obligations 4 years 8.75% $1,337 Rent - $2,560 Card - $765 Total - $3,325 Gross Wage Income Dividend & Rental Total Income 35% monthly debt service Income amount $49,540 0 $49,540 $1,445 House Expenditure HEM – Borrowing Total amount of all Total Repayments of Loans Measure limit Loans and Rent Obligations Moderate, $3,197 n/a $56,500 $4,662 Loan fits within guidelines Recommendation No Reject Loan The trade-in of $27,000 covers the 10% Student Bank recommends that he cancel his credit required deposit and the 4 years for card and move to more affordable housing before repayment is below Student Bank’s maximum applying again. The purchase of a less expensive term. However, Mr Qtas is not in a good car would also greatly improve his chances of loan position financially. It is unlikely he would be acceptance due to lower monthly payments. able to repay the loan within a reasonable Additionally, the trade-in value of his Audi should period. With his existing rent and credit card be reconsidered as it is unlikely it can be traded in for $27,000 when it is currently only valued at payments he is already over his 35% debt service coverage limit. Additionally, the HEM $20,000. If the Audi can be sold for $27,000 clarification is sought as to why Mr Qtas is seeking measure which takes into account Mr Qtas’ a $54,000 loan, which exceeds the purchase price, moderate living expenses indicates that he is not in a financial position to take on new loans rather than $53,000. at this level.

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Customer #1 Qtas, Ben – File Number XXX Credit Score Calculation Credit Score Factor

Point Value

Customer Occupation Unskilled worker Length of time in current employment Over 5 years Marital Status Single Housing Status Renting Length of time at current address 2 to 4 years (Rent) Number of dependent children 0 Age 26-49 Existing bank customer No Credit Rating Good Total

Notes: -

Assuming aviation transport is referring to moving baggage to/from planes, driving supply trucks and buses to/from planes. The low wage indicates that this is an unskilled occupation. Assuming Mr Qtas is renting his entire home, not just a room The interest rate was raised by 1% over the prime rate as Mr Qtas’ credit score is only six points above the ‘reject loan application’ rank. Based on Mr Qtas’ expensive taste in car and high rent payments, it is assumed that the applicant’s lifestyle is relatively high cost for his income bracket and asset base, therefore he was assigned ‘Moderate’ living expenses. As Mr Qtas’ earnings were very close to the next income bracket, expenses were interpolated (assuming moderate living expenses at $40,000 were also $32,400)

30 70 20 40 10

-

-20 80 0

-

100 330

Other Calculations Measure

Components Income - $49,540 HEM Tax - $7,647.50 (income – tax – expenses) Expenses - $38,696 Requested loan - $54,000 Total amount of all loans (add) Credit card balance - $2,500 Requested loan - $1,337 Total repayments of loans and Rent - $2,560 rent obligations (add) Card - $765 -

Monthly repayments were calculated using the following formula (the same formula was used for all applicants):

𝑖 𝑃 (𝑛) 𝑃𝑀𝑇 = 𝑖 (1 − (1 + )−𝑛𝑡 ) 𝑛

0.0875 ) 12 𝑃𝑀𝑇 = 0.0875 −12×4 ) (1 − (1 + 12 ) 54000 (

𝑃𝑀𝑇 = $1,337

Where: -

PMT = monthly payment P = principal amount i = interest rate (annual)

-

n = number of payments per year t = number of years

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