LOAN AND

DISCOUNTS
FUNCTIONS

PREPARED BY:
JOSHUA DE JESUS BSBA III-B
 WHAT IS LOAN?
 Loan in simplest terms can be explained as a thing
that is borrowed, especially a sum of money that is
expected to be paid back with Interest.
 The act of giving money, property or other material
goods to a another party in exchange for future
repayment of the principal amount along with
interest or other finance charges is called loan.
 A loan may be for a specific, one-time amount or can
be available as open-ended credit up to a specified
ceiling amount.
 WHAT IS DISCOUNT?

 Discounting is the process of determining of the

present value of a payment or a stream of
payments that is to be received in the future.
Given the time value of money, a dollar is worth
more today that it would be worth tomorrow.
Discounting is the primary factor used in pricing
a stream of tomorrow`s cash flow.
 To deduct the charge for making a loan
from the loan`s principal before
distributing funds to the borrower.
 To adjust the value of an assets on the
basis of information rather than activity
or events.
 For example investors may already have
discounted a firm`s stock price because of
the anticipation of weak earnings.
 Banks do not only accept deposits but also
extended loans
 It is Important that the bank will be able to
collect the amount needed to pay the interest to
their depositor
 While most on the customers of commercial
bank are businessmen.
 Their need is mostly short term
 DISCOUNT RATE
 The discount rate is used in the concept of
the Time value of money- determining the
present value of the future cash flows in
the discounted cash flow analysis. It is
more interesting for the investor`s
perspective. The time value of money means
a fixed amount of money has different
values at a different point of time.
 INTEREST RATE
 The interest rate is the amount charged by a
lender to a borrower for the use of assets. The
lenders here are the banks and borrowers are
the individuals.
 Interest rate depend on a number of factors
such as Borrowers creditworthiness, a risk
associated with lending. Whereas, the discount
rate calculated after taking consideration the
average rate that on bank would overnight loans.
 LOANS VS DISCOUNTS
 Discount rate is the interest that the FEDERAL RESERVE
BANK charges to the depository institutions and to commercial
banks on its overnight loans. It is set by the FEDERAL
RESERVE BANK, not determined by the market rate of
interest.
 An interest rate is an amount charged by a lender to a
borrower for the use of assets. Interest rates are mostly
calculated on an annual basis, which is also known as the annual
percentage rate. The assets borrowed can be cash, large assets
such as a piece of machinery, vehicles or building.
 TYPES OF LOANS
 Personal loans - You can get these loans at almost
any bank. The good news is that you can usually spend the
money however you like. Personal loans are often
unsecured and fairly easy to get if you have average
credit history. The downside is that they are usually for
small amounts, and the interest rates are higher than
secured loans.
 Cash advances - If you are in a pinch and
need money quickly, cash advances from
your credit card company or other payday
loan institutions are an option. These loans
are easy to get, but can have extremely
high interest rates. These loans should
really only be considered when there are no
other alternative ways to get money.
 Student loans - These are great
ways to help finance a college
education. The interest rates are very
reasonable, and you usually don't have
to pay the loans back while you are a
full-time college student.
 Mortgage loans - This is most likely the biggest
loan you will ever get! If you are looking to purchase
your first home or some form of real estate, this is
likely the best option. These loans are secured by the
house or property you are buying. That means if you
don't make your payments in a timely manner, the bank
or lender can take your house or property back!
Mortgages help people get into homes that would
otherwise take years to save for. They are often
structured in 10-, 15- or 30-year terms, and the
interest you pay is tax-deductible and fairly low
compared to other loans.
 Home-equity loans and lines of credit
- Homeowners can borrow against equity they
have in their house with these types of loans.
The equity or loan amount would be the
difference between the appraised value of your
home and the amount you still owe on your
mortgage. These loans are good for home
additions, home improvements or debt
consolidation. The interest rate is often tax
deductible and also fairly low compared to other
loans.
 Small business loans - Your local banks
usually offer these loans to people looking to
start a business. They do require a little
more work than normal and often require a
business plan to show the validity of what you
are doing. These are often secured loans, so
you will have to pledge some personal assets
as collateral in case the business fails.
 HOME LOAN is a loan advanced to a
person to assist in buying a house or
condominium. Purchasing a house can be a
valuable form of investment. However, it
requires considerable thought and
careful financial planning before taking
on such a big step.
 BUSINESS LOAN Businesses require an
adequate amount of capital to fund startup
expenses or pay for expansions. As such,
companies take out business loans to gain the
financial assistance they need. A business loan is
debt, that the company is obligated to repay
according to the loan’s terms and conditions.
According to the U.S. Small Business
Administration, before approaching a lender for a
loan, it is imperative for the business owners to
understand how loans work and what the lender
will want to see from the owner.
 SECURED LOANS
 A secured loan is a loan in which the borrower pledges
some asset (e.g. a car or property) as collateral.
 Secured loans are loans that rely on an asset as
collateral for the loan.
 In the event of loan default, the lender can take
possession of the asset and use it to cover the loan.
 Interests rates for secured loans may be lower than
those for unsecured loans.
 The asset may need to be appraised before you can
borrow a secured loan.
 UNSECURED LOANS
 Unsecured loans don’t have asset for collateral. These
loans may be more difficult to get and have higher interest
rates.
 Unsecured loans rely solely on your credit history and your
income to qualify you for the loan.
 In case of default, the lender has to exhaust collection
options including debt collectors and lawsuit to recover the
loan.
 For example§ credit card debt § personal loans
 bank overdrafts
 credit facilities or lines of credit
 OPEN-ENDED LOANS
 Open-ended loans are loans that you can borrow over
and over.
 Credit cards and lines of credit are the most common
types of open-ended loans.
 With both of these loans, you have a credit limit that
you can purchase against.
 Each time you make a purchase, your available credit
decreases.
 As you make payments, your available increases allowing
you to use the same credit over and over.
 CLOSED-ENDED LOANS
 Closed-ended loans cannot be borrowed once they’ve
been repaid.
 As you make payments on closed-ended loans, the balance
of the loan goes down.
 However, you don’t have any available credit you can use
on closed-ended loans.
 Instead, if you need to borrow more money, you’d have to
apply for another loan.
 Common types of closed-ended loans include mortgage
loans, auto loans, and student loans.
 The 4 C's of Credit for loans

Character

4C Capacity
Collateral Concept To
Repay

Capital
 Character refers to the financial history of the
borrower; that is, whet kind of "financial
citizen" is this person or business?
 Character is most often determined by looking
at the credit history, particularly as it is stated
in the credit score (FICO score).
 Factors that will affect the credit score include:
 Late payments
 Delinquent accounts
 Available credit
 Total debt
 Capacity refers to the ability of the
business to generate revenues in order
to pay back the loan. In other words
capacity measures a borrower's ability
to repay a loan by comparing income
against recurring debts. Since a new
business has no "track record" of
profits, it is riskiest for a bank to
consider.
 Capital refers to the capital assets of the
business.
 Capital assets might include machinery and
equipment for a manufacturing company, as well as
product inventory, or store or restaurant fixtures.
 Banks consider capital, but with some hesitation,
because if your business folds, they are left with
assets that have depreciated and they must find
someplace to sell these assets, at liquidation value.
You can see why, to a bank, cash is the best asset.
 Collateral is the cash and assets a business
owner pledges to secure a loan.
 In addition to having good credit, a proven
ability to make money, and business assets,
banks will often require an owner to pledge
his or her own personal assets as security for
the loan.
 Banks require collateral because they want
the business owner to suffer if the business
fails.
PROCEDURES FOR LOANS APPLICATION
1. The Loan File
The loan file is where it all begins.
Depending on whether or not you are the
loan processor of a larger company or
both the loan officer and loan processor
of a smaller office, the work of the loan
processor starts here with this file (well
folder). The loan file will contain--you
guessed it--the loan application.
 PROCEDURES FOR LOANS APPLICATION
2. The Credit Report
In many cases, the credit report may already be
provided for you. The loan officer may have already run
this report from the beginning before going any further
with the loan application process. The loan applicant has
consented to have their credit report pulled for purposes
of evaluating their loan worthiness. If the credit report
is not already attached to the loan file, then you'll need
to double check the application to make sure that they
have consented to the credit report check and then pull
their credit report.
 PROCEDURES FOR LOANS APPLICATION
3. Title Records and Information
If you are processing a loan request for an
automobile, boat, house, and so on, you will need
to verify the title information (VOT:
Verification of Title). This will not be necessary
for all loans which you might handle. Title
verification helps to determine if there is a lien
on the object that the borrower is requesting a
loan on.
 PROCEDURES FOR LOANS APPLICATION

4. Verify Income Sources

Probably the most important step is to verify all
the income, assets, and employment information of
the borrower. You need to verify the employment of
the borrower (VOE). You need to verify the income of
the borrower (VOI). You also need to verify the
assets listed by the borrower (VOA) and any other
income information required or produced by the
borrower
 PROCEDURES FOR LOANS APPLICATION
5. Appraisals, Insurances, and Inspections
If you have verified all the income and employment sources for
the loan applicant (or you are far along in the process and you are
only waiting for replies from the necessary parties), you are now
ready to continue with any necessary appraisals, proof of
insurance, or inspections. These items will vary greatly depending
on the state and local laws that govern the loan which the applicant
is requesting, as well as the type of loan itself. For example, if you
are handling a mortgage loan, you'll need to have the property
appraised, inspected, get proof that there is no termite presence
(in some states), and other procedures.
 PROCEDURES FOR LOANS APPLICATION
6. Loan File Review
If there are any mistakes, errors, or oversights, this is where
they need to be caught. At this point, the loan process is
complete; you have obtained the credit reports for the loan
applicant. You have verified all income, deposits, and employment.
You have appraised and inspected the property, the vehicle, or
other asset, if needed. Now you need to check and re-check all of
this documentation. If any of the information seems vague, you
either need to clarify the information or write in an explanation as
to why this information isn't provided in greater detail.
 PROCEDURES FOR LOANS APPLICATION

7. Certify and Deliver the File

Now that you have reviewed all the information in the
loan file and are satisfied with the documentation you have
provided and verified, you will now finalize the loan
package and deliver it to the lender, underwriter, and
manager.
 In summary, your file should include the loan application,
this is the typed and signed application with all information
provided by the loan applicant, the credit report,
all verifications of employment, income, assets (W2s,
paystubs, tax returns, and bank statements, for instance),
any valuation reports (inspections, appraisals, proof of
insurance), any title reports (particularly noting any liens),
and any public legal disclosures that must be signed by the
loan applicant. The final product should be sent registered
mail to the appropriate parties (most likely the lender or the
underwriter).
 REQUIREMENTS FOR LOAN
Employed / Professionals:
1. Two (2) valid government-issued photo-bearing IDs (for list of
acceptable IDs)
2. Proof of income documents:
- Three (3) months original pay slips; OR
- Latest BIR Form 2316 or ITR
Self-employed:
1. Two (2) valid government-issued photo-bearing IDs (for list of
acceptable IDs,)
2. Proof of income documents:
- DTI/SEC business registration certificate
- Three (3) years audited financial statements (FS)
- Latest ITR Form 1700 or 1701
 FOLLOW-UP/COLLECTION OF LOANS

Principles of Collection
Certain principles have been found especially useful in
the field of collection and may be grouped into the
following areas:
-Collect the money
-maintain a systematic follow-up
-get the customer to discuss the account
-and, preserve goodwill
 FOLLOW-UP/COLLECTION OF LOANS

 Collect the money

The primary job of the person responsible for collections

is to collect the money as close to the terms of the
obligation as possible. There should never be any doubt as to
why the individual is engaged in this particular task. The
debtor has an obligation to pay within the terms of the
agreement. It is the job of the collection person to make
sure that this obligation is met. The tone may be indulgent at
first, but should be intensified and accelerated as much as
necessary to ensure payment by a debtor.
 FOLLOW-UP/COLLECTION OF LOANS

 Systematic follow-up
After the initial contact with the delinquent customer, it is
important to keep additional contacts on a strict schedule. If
the collector, for example, is told that a check will be mailed in
a few days, it should be noted. If the check is not received at
the promised time, a follow-up is essential, otherwise the
collection effort will become ineffective.

 Systematic follow-up of accounts, even those which can not pay

immediately, reinforces the serious nature of the outstanding
debt and emphasizes the importance attached to it by the
creditor. That in itself is an important collection advantage.
 FOLLOW-UP/COLLECTION OF LOANS
 Discussing the account
Once the collector gets the customer to talk about the delinquent
account, the collector is well on the way to receiving payment. That is why
emphasis is placed on inviting the debtor to talk. The object of the
discussion is to get the debtor's explanation of the delinquency. It may be
a question of a dispute; it may be due to a temporary shortage of funds;
or the customer may intend to hold off payment so the creditor's money
can be used in its own business.

 During the discussion, the collector may begin to see the debtor's
situation more clearly. If the slow payment is the result of a temporary
cash flow problem, tolerance of slower payments may be accepted, but it
should be emphasized to the customer that the new schedule of payments
must be completed.
 FOLLOW-UP/COLLECTION OF LOANS

 Preserve goodwill
Even though the customer may be experiencing some difficulty
in meeting payments, it does not preclude them from becoming a
good customer in the future. Therefore, it is important to
preserve goodwill while pressing for collection. This requires not
only tact, but knowledge of the customer and industry. One of
the advantages claimed by specialized collection personnel is that
they can develop these techniques to their fullest. On the other
hand, the team concept presents the opportunity for credit and
customer service personnel to better understand the relationship
of the customer to the industry and overall marketing objectives
of the company.