Ira Loraine C.

Casaquit March 8, 2024

BSBA-3A
FM132-Credit and Collection

CASE ANALYSIS 1: PERSONAL LOAN APPLICATION

Scenario:
Sarah, a recent college graduate, is looking to take out a personal loan to
purchase a car. She approaches her local bank to apply for a loan. The loan
officer asks her to fill out an application form and submit supporting
documents such as proof of income, identification, and credit history. After
reviewing her application, the bank approves her loan with a fixed interest rate
and a repayment period of five years.
Questions:
1. What type of application form would Sarah be required to fill out when
applying for the personal loan?
 The type of application that she would have to fill in order to apply for the
personal loan is a personal application form that asks for details about the
person applying for the personal loan, like name, contact details, address,
details of employment, and income, details about the purpose of the loan and
how the loan would be repaid.

2. What documents would Sarah need to provide as proof of income to support

her loan application?
 The documents would Sarah need to provide as proof of income to support
her loan application is her pay slips, bank records, or letters from her job to
show how much money she earns for her loan request.

3. How does Sarah's credit history impact her chances of getting approved for
the loan?
 Sarah's credit history is one of the vital determinants of the credit worthiness
that she has. A good credit history shows decent financial records, which raise
a chance of one to get a loan with good terms and conditions.

4. What is the significance of Sarah providing identification documents during

the loan application process?
 Providing this identification documents, to verify that indeed Sarah is the one
claiming to be above 18 years and that she is not legally bound elsewhere to
another financial institution. This will help in protecting against identity theft
and fraud, not just on the client, but also the said bank.
5. What factors might the bank consider when determining the interest rate for
Sarah's loan?
 The bank considers several factors when determining the interest rate for
Sarah's loan, including her credit score, credit history, income, loan amount,
and loan term. Generally, borrowers with higher credit scores and stable
income qualify for lower interest rates.

6. How does the fixed interest rate on Sarah's loan affect her monthly
payments?
 A fixed interest rate means that Sarah's interest rate remains constant
throughout the loan term. This allows her to predict her monthly payments
accurately, as they won't fluctuate with changes in the market interest rates. It
provides stability and makes budgeting easier for Sarah.

7. What are the key terms and conditions outlined in the loan agreement that
Sarah needs to review before signing?
 Key terms and conditions outlined in the loan agreement include the loan
amount, interest rate, repayment schedule, late payment fees, prepayment
penalties, and any other charges or conditions associated with the loan.
Sarah needs to carefully review these terms to understand her obligations and
rights as a borrower.

8. What consequences could Sarah face if she fails to make timely payments on
her loan?
 Sarah can be penalized in various ways if she does not make her loan
payments on time. This includes additional interest in the name of late
payment charges, possibly spoiling her credit report, actions through
collection agencies, and at worst, repossessions of her bought car. She,
therefore, has reasoning to ensure that her loan repayment is of major
concern.

9. How does the repayment period of five years affect the total amount Sarah
will pay back over the life of the loan?
 The five years in the repayment term heighten the total amount Sarah is going
to pay back within the loan's lifetime. Normally, a longer repayment period is
usually related to not very huge monthly payments yet sums up to a greater
total over the time in terms of interest paid. On the other hand, a shorter
repayment period provides for a higher monthly payment but less total interest
to be paid.

10. What options does Sarah have if she wants to pay off her loan early?
 If Sarah needs to pay the loan before the established time, she can get in
contact with the bank for the terms of the prepayment clause without penalty.
Sarah should review her loan agreement to understand any terms or penalties
 associated with early repayment and decide the most suitable option based
on her financial situation.
CASE ANALYSIS 2: BUSINESS LINE OF CREDIT APPLICATION

Scenario:
John owns a small business and needs access to a line of credit to
manage cash flow fluctuations. He decides to apply for a business line of
credit from a local credit union. During the application process, John submits
his business financial statements, tax returns, and a business plan outlining
his company's operations and future projections. After a thorough review, the
credit union approves John's application, providing him with a revolving line
of credit with a predetermined limit.

Questions:
1. What type of financial statements would John need to provide as part of his
business line of credit application?
 John would need to provide financial statements such as the balance sheet,
income statement, and cash flow statements to have something that they can
use to make sense of business financial health and performance.

2. How do John's business tax returns demonstrate his company's financial

stability and creditworthiness?
 John's business tax returns create evidence of the financial aspect of his
company, something that will determine sustainability. Such a business, if one
were to extend John credit, manifested in whether the company is profitable,
growing in revenue, and if it is following all the necessary tax laws. The
potential bases of this data are in this document, predicated on the business's
financial history and its ability to consistently generate income.

3. Why is it important for John to submit a detailed business plan as part of his
application?
 The detailed business proposal becomes a very important document in the
sense that it outlines the operations, objectives, strategies, and hence future
projection of what John's company is likely to realize. This is also with regard
to the assessment and determination of how viable his business will be and
whether he can manage prospective risks effectively.

4. What criteria might the credit union use to assess John's eligibility for a
business line of credit?
 The credit union may assess John's eligibility based on criteria such as, its
revenues and profitability of the business, stability in the cash flow, credit
history, and even the business plan would be concerned by the credit union.
5. How does the predetermined limit on the line of credit impact John's
borrowing capacity?
 The predetermined limit on the line of credit serves as a guideline for John's
borrowing capacity, dictating the maximum amount he can access from the
credit facility. This limit is established based on factors such as his business's
financial health, creditworthiness, and the lender's risk assessment.

6. What are the advantages of having a revolving line of credit for managing
cash flow compared to a traditional term loan?
 A revolving line of credit allows John to borrow funds as needed up to the
approved limit and repay them at his own ways. He can access funds multiple
times without reapplying compared to a traditional term loan with fixed
monthly payments.

7. What are the potential risks associated with utilizing a business line of credit
for day-to-day operations?
 Potential risks of utilizing a business line of credit for day-to-day operations
may result in higher interest costs over time particularly if the borrowed funds
are not repaid promptly leading to increased financial strain on the business
which could affect John's ability to meet repayment obligations, leading to
financial default.

8. What terms and conditions should John review carefully before accepting the
line of credit offer?
 John should review terms and conditions such as the interest rate, repayment
terms, fees, penalties for late payments or exceeding the credit limit to ensure
him what obligations and responsibilities associated with the line of credit and
make an informed decision about whether to accept the offer or not.

9. How does the interest rate structure of the line of credit affect John's
borrowing costs?
 The interest rate structure of the line of credit affects John's borrowing costs
by determining the amount of interest he'll pay on the borrowed funds. A
higher interest rate increases borrowing costs, while a lower rate reduces
them, influencing the overall affordability of the credit.

10. What steps can John take to ensure responsible use of the line of credit and
maintain a positive relationship with the credit union?
 To ensure responsible use of the line of credit and maintain a positive
relationship with the credit union, John can monitor his cash flow closely and
borrow only what's necessary, make timely repayments, and adhere to the
terms of the credit agreement diligently. Additionally, he can explore ways to
improve his business's financial performance to strengthen his
creditworthiness over time.