Goal of This Chapter: To learn about the many types of loans lenders make to consumers

(individuals and families) and to real estate borrowers and to understand the factors that
influence the profitability and risk of consumer and real estate loans. In addition, the chapter
examines how consumer and real estate loan rates may be determined and the options a loan
officer has today in pricing loans extended to individuals and families.
Concept Checks
18-1.What are the principal differences among residential loans, non-residential instalment
loans, non-instalment loans, and credit card or revolving loans?

Residential loans are credit to finance the purchase of a home or fund improvements on a
private residence.
Non-residential loans to individuals and families include:
 Installment loans and
 Non-installment loans
 Credit card loans and Revolving credit
Installment loans: Short-term to medium-term loans, repayable in two or more consecutive
payments (usually monthly or quarterly), are known as installment loans. Installment loans
are paid off gradually over time. Installment loans usually finance large-ticket purchases,
such as automobiles or household furniture, Installment loans help the bank recover funds
that can be reloaned more quickly but they generally require a more intensive credit
investigation by the bank.
Non-installment: Short-term loans individuals and families draw upon for immediate cash
needs that are repayable in a lump sum at the end of the loan are known as non-installment
loans. Non-installment loans usually are directed at current living expenses.
Credit card loans and Revolving credit: Bank credit cards offer convenience and a
revolving line of credit that the customer can access whenever the need arises.
18-2.Why do interest rates on consumer loans typically average higher than on most other
kinds of loans?
Interest rates on consumer loans are typically higher than on most other kinds of loans since
they are among the most costly and most risky to make per dollar of loanable funds.
Consumer loans also tend to be cyclically sensitive. Moreover, consumers tend to be
relatively unresponsive to changes in interest rates when they go out and borrow money.
18-3.What features of a consumer loan application should a loan officer examine most
carefully?
A loan officer should examine character and purpose, income levels, employment and
residential stability, and pyramiding of debt when evaluating a consumer loan application.
18-4.How do credit-scoring systems work?
Credit-scoring systems use statistical techniques (usually multiple discriminant analysis) to
classify borrowers based on selected characteristics of each borrower as to whether they are
likely or unlikely to repay the loan they have requested. Credit-scoring systems are usually
based on discriminant models or related techniques, such as logit or probit analysis or neural
networks, in which several variables are used jointly to establish a numerical score for each
credit applicant. If the applicant’s score exceeds a critical cut off level, he or she is likely to
be approved for credit in the absence of other damaging information. If the applicant’s score
falls