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Uses of funds in Chapter Contents

commercial banks
(Part 1) 1. Loans
2. Investments

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Bank loans Personal loan

 Who are bank customers?  What is a personal loan?

– Personal loans (Individual customers)
– Business loans (Corporations customers)
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– A personal loan is money a person borrow from a bank
(and other financial institutions such as credit union or
finance company) that normally will be paid back in monthly
payments. EX: VPB - FeCredit
– Monthly payment can be:
 Installment: fixed equal monthly payment
 Amortization schedule: the size of the monthly installment debt
payments will be determine based on some variables
 Minimum payment: if client uses revolving debt
– Revolving debt: bank set a credit limit, and the borrower can
repeatedly borrow money up to the limit and repay it over time.

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Do we need to post collaterals in a

Why do we need personal loans? personal loan?

 “Use first, pay later”  Most personal loans are “unsecured” — not
 Unexpected expenses. backed by collateral.
– Ex: Credit card, Consumer loan
 Personal loan can be used for any purposes:
– Buying a new smart phone  However, sometime customers need to post
– Buying a new car collateral
– Paying debt (to your friend!) – A secured loan backed by something you own is
typically cheaper, but you can lose the asset if you
– Buying a new house
default. You usually can use the money for any
– Student loan reason.
– Credit card…
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How do banks make credit decisions? Types of personal loan

 Banks make their decisions based on factors  Installment loan

including:  Amortization loan
– Annual Income
 Revolving loan
– Credit score
 Customers with excellent credit receive the lowest rates
– Credit history report (CIC – Credit Information
Centre)
– Debt-to-income ratio
– Collateral
7  Customers with collateral receive lower rate.. 8

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Installment loan How to calculate installments?

 An installment loan is a loan that is repaid by

the borrower in equal monthly payments that V0  r  (1  r)n
T
include interest and a portion of the principal. (1 r)n 1
 The monthly payments are equal
 Installment loan is usually applied to: - T : Monthly installment
– Car loans - Vo : Principal
– Housing loans - r : Interest rate per month
– Consumer loans - n : number of payment

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Beginning Ending
Period Balance Principal Interest Installment Balance

1 60.000.000 9.773.273 550.000 10.323.273 50.226.727

Example 1
2 50.226.727 9.862.861 460.412 10.323.273 40.363.866
 A customer applied for a 6-month consumer
3 40.363.866 9.953.271 370.002 10.323.273 30.410.595
loan to buy a new Samsung smart TV. The
principal is 60.000.000 VND, interest rate is 4 30.410.595 10.044.509 278.764 10.323.273 20.366.086
11%/annum. The bank requires the customer to
pay back in monthly equal payments. Question: 5 20.366.086 10.136.584 186.689 10.323.273 10.229.502
– What is the monthly installment?
– Create a payment schedule for the customer 6 10.229.502 10.229.502 93.770 10.323.273 -

60.000.000 1.939.637 61.939.637

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Example 2
 A customer applied for a 4-month consumer
loan to buy a new smart phone. The information
in the loan contract is as follow:
– Principal: 25.000.000 VND
– Interest rate: is 12,3%/annum
– Monthly payments: equal
 Question:
– What is the monthly installment?
– Create a payment schedule for the customer
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Amortization loan
 What is amortization loan?
– A loan with scheduled periodic payments that are
applied to both principal and interest.
– The monthly payment first use to pay off the relevant
interest expense for the period, after which the
remainder of the payment reduces the principal.
– The principals paid monthly are equal
– Interest is calculated based on the most recent
ending balance of the loan
 The interest amount decreases as payments are made.
15  The total monthly payment decreases over time.
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Example 3
 A customer applied for a 25-year housing loan.
The information in the loan contract is as follow:
– The house price: 2.500.000.000 VND
– Bank agrees to lend up to 70% the house price
– The house will be used as collateral
– Fixed interest rate: is 9,7%/annum
– Payments will be made monthly in equal amount.
 Question:
– What is the monthly installment?
– Create a payment schedule for the customer
Amortization loan (cont.)
 Amortization loan is usually applied to:
– Car loans
– Housing loans
– Consumer loans
– …
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Beginning Monthly Ending

Period Balance Principal Interest payment Balance

Example 4 1 60.000.000 10.000.000 550.000 10.550.000 50.000.000

2 50.000.000 10.000.000 458.333 10.458.333 40.000.000

 Use information in example 1 and find out the
differences 3 40.000.000 10.000.000 366.667 10.366.667 30.000.000
 A customer applied for a 6-month amortization
4 30.000.000 10.000.000 275.000 10.275.000 20.000.000
consumer loan to buy a new Samsung smart
TV. The principal is 60.000.000 VND, interest
5 20.000.000 10.000.000 183.333 10.183.333 10.000.000
rate is 11%/annum.
 Question: 6 10.000.000 10.000.000 91.667 10.091.667 -
– What is the first monthly payment?
– Create a payment schedule for the customer 60.000.000 1.925.000 61.925.000
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Example 5 Example 6

 Use information in example 2 and find out the
differences
 A customer applied for a 4-month consumer loan to buy
a new smart phone. The information in the loan contract
is as follow:
– Principal: 25.000.000 VND
– Interest rate: is 12,3%/annum
– Type of payment: amortization loan with equal
monthly principal being made
 Question:
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– Create a payment schedule for the customer
 Use information in example 3 and find out the differences
 A customer applied for a 25-year housing loan. The
information in the loan contract is as follow:
– The house price: 2.500.000.000 VND
– Bank agrees to lend up to 70% the house price
– The house will be used as collateral
– Fixed interest rate: is 9,7%/annum
– Monthly payments will be amortization over 25 years.
 Question:
20 – Create a payment schedule for the customer

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Revolving loan Example 7

 The loan in which the bank offers a credit limit  A credit card statement has information as
 Borrower can repeatedly borrow money up to follow: Credit card limit: 30.000.000 VND,
the limit and repay it over time. interest rate: 25%/annum, History of
– Ex: Credit card, line of credit transactions:
Transaction
 Minimum payments can be required date Description of transaction Amount
– Customer need to pay minimum payment to maintain 26-Jan Beginning balance -
the loan (5% of ending balance) 29-Jan Pay for electricity bill 1.580.000
 Interest will be calculate based on the credit 3-Feb Pay for water bill 320.000

balance that has been used by the customer 19-Feb Parson Store 4.900.000
21 22 There is no more transaction in Feb

Example 7 (cont.) Business loans

 Question:  What is a business loan?

– Calculate the interest amount for that credit card in
Feb, assume that the bank calculates interest by the
end of 25th every month
– Suppose that the customer needs to pay at least 5%
of total ending balance each month. What is the
minimum payment of Feb?
– A business loan (commercial loan) is a debt-based
funding arrangement between a firm and a bank.
– It is typically used to fund:
 Working capital
 Major capital expenditures such as: investing in equipment
or investing in a firm’s project.

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