Consumer
Loans
AAPRESENTATION BY
PRESENTATION BY GROUP
GROUP 3 3
PROFESSOR: MS. PHUNG THI THU HUONG
PROFESSOR: MS. PHUNG THI THU HUONG
PHD.NGUYEN
PHD. NGUYEN DINH
DINH TRUNG
TRUNG
1 INTRODUCTION
2 MAIN CONTENT
Types &
Charateristics
How to Evaluating
Content Laws & Regulations
Real Estate Loans
Determining the Rate
of Interest and Other
Loans Terms
The consumer loans
in Vietnam cases
3 CONCLUSION
Definition
A consumer loan is a loan given
to consumers to finance specific
types of expenditures. In other
words, a consumer loan is any
type of loan made to a consumer
by a creditor. The loan can be
secured or unsecured.
How do
Consumer Loans Work?
1 Receive customer's
personal loan application
4
Consumer loan approval
2 Review the terms of the
personal loan
5 Sign the contract and
make payment
3 Verify documents and
reasons for lending
Types of Loans
Granted to Individuals and Families
Credit Card
Residential Nonresidential Loans and
Mortgage Mortgage Revolving
Loans Loans Credit
Types of Loans
Granted to Individuals and Families
A residential mortgage loan is a
mortgage used to buy a residence
Residential
Mortgage Have terms ranging from 10 to 40 years,
Loans with 30- and 15-year loans being the
most common
Types of Loans
Granted to Individuals and Families
Types:
Fixed-rate mortgages
Adjustable-rate mortgages (ARMs)
Residential Graduated-payment mortgages (GPMs)
Mortgage Growing-equity mortgages
Loans Second mortgages
Shared-appreciation mortgages
Balloon payment mortgages
Types of Loans
Granted to Individuals and Families
Installment Loans Non Installment
Loans
Credit accounts that you Single-payment loans
will repay within a and loans that permit the
certain period of time. borrower to make
They may or may not Nonresidential irregular payments and
include interest. Mortgage to borrow additional
Short-term to medium- Loans funds without submitting
term loans, repayable in a new credit application;
two or more consecutive also known as revolving
payments or open-end credit.
Types of Loans
Granted to Individuals and Families
Credit cards issued by VISA, MasterCard, JCB
and many smaller card companies
Offer their holders access to either installment
or noninstallment credit Credit Card
Installment users of credit cards are far more Loans and
profitable: provide higher risk-adjusted Revolving
returns Credit
Credit cards offer convenience and revolving
lines of credit that holders can access
whenever they need
Types of Loans
Granted to Individuals and Families
Credit card transaction process
Individual Retail Outlet
Card-Issuing Cleaning Local Merchant
Bank Network Bank
Types of Loans
Granted to Individuals and Families
New Credit Card Regulations
Credit Card
OTP-based Card Activation Loans and
Credit Limit Revision Revolving
Computation of Interest Credit
Types of Loans
Granted to Individuals and Families
Debit Cards
Credit Card
issued by the bank to the cardholder to pay Loans and
instead of cash. Debit card has all the Revolving
functions of a payment card Credit
Characteristics of
Consumer Loans
01 02
Profitable credits with “sticky”
Most costly and most risky
interest rate
03 04
Cyclically sensitive Interest inelastic
05
Influenced by education and
income levels
Evaluating
a Consumer Loan Application
Character and Purpose Income Levels Deposit Balances
The lender must be assured Both the size and stability An indirect measure of
that the borrowing of an individual's income income size and stability
customer feels a keen sense are considered important maintained by the
of moral responsibility to by most lenders customer
repay a loan on time
Employment and Pyramiding of Debt
Residential Stability
Length of residence may also be Lenders are especially sensitive
considered because the longer a to evidence that debt is piling up
person stays at one address, the relative to a consumer's income.
more stable his or her personal
situation is presumed to be.
Evaluating
a Consumer Loan Application
How to Qualify for a
Consumer Loan
One positive factor is home ownership or, for that
matter, ownership of any form of real property,
such as land or buildings
Another positive factor is maintaining strong
deposit balances
The most important thing to do, however, is to
answer all the loan officer's questions truthfully
Evaluating
a Consumer Loan Application
The Challenge of
Consumer Lending
The key features of consumer loans that help
lenders hold down potential losses are that most
are small in denomination and often secured by
marketable collateral, such as an automobile.
Evaluating
a Consumer Loan Application
Credit Scoring Consumer
Loan Applications
The Theory of Credit Scoring
Credit scoring is a statistical analysis performed by
lenders and financial institutions to determine the
creditworthiness of a person or a small, owner-operated
business. Credit scoring is used by lenders to help decide
whether to extend or deny credit. A credit score can
impact your ability to qualify for financial products like
mortgages, auto loans, credit cards, and private loans
Evaluating
a Consumer Loan Application
Credit Scoring Consumer
Loan Applications
The FICO Scoring System
FICO scores range from 300 to 850, with higher values
denoting less credit risk to lenders
An individual with a lower FICO score implies a lower
probability of timely repayment if the lender should grant
a loan and, therefore, a loan is less likely to be granted
Evaluating
a Consumer Loan Application
Credit Scoring Consumer
Loan Applications
The FICO Scoring System
its credit scores appear to be based on five different types
of information
The Borrower's Payment History.
The Amount Of Money Owed.
The Length Of A Prospective Borrower's Credit History.
The Nature Of New Credit Being Requested.
The Types Of Credit The Borrower Has Already Used
TRUTH-IN-LENDING ACT,
1968
Laws and promote informed use of
credit among consumers by
Regulations
requiring full disclosure of
credit terms and costs
Applying to
expressly grants consumers
It is mostly presented before an
access to their credit files,
audience.
Consumer Loans
usually kept by credit bureaus
permits consumers to dispute
billing errors with a merchant
It is mostly presented before an
or credit card company and
1. CUSTOMER DISCLOSURE audience.
receive a prompt investigation
REQUIREMENTS of billing disputes
Laws and
FAIR CREDIT REPORTING ACT
permits consumers to dispute
Regulations
billing errors with a merchant or
credit card company and receive a
prompt investigation of billing
Applying to
disputes.
Consumer Loans FAIR CREDIT BILLING ACT, 1974
2021 that customers applying
requires
for Itcredit cards be before
given anearly
is mostly presented
written notice about required fees
1. CUSTOMER DISCLOSURE audience.
to open or renew a credit account
REQUIREMENTS
Laws and
FAIR CREDIT AND CHARGE-CARD
DISCLOSURE ACT
Regulations
requires that customers applying
for credit cards be given early
written notice about required fees
Applying to
to open or renew a credit account
Consumer Loans FAIR DEBT COLLECTION PRACTICES ACT
limits
2021how far a creditor or
collection agency can go in pressing
It is mostly presented before an
that customer to pay up if a credit
1. CUSTOMER DISCLOSURE audience.
customer gets behind in his or her
REQUIREMENTS loan payments
EQUAL CREDIT
OPPORTUNITY ACT
Prohibits discrimination in any
aspect of a credit transaction. It
applies to any extension of credit,
including extensions of credit to small
businesses, corporations, partnerships,
and trusts
2. OUTLAWING CREDIT
An exception is made for home
mortgage loans so the federal
DISCRIMINATION
government can collect information
on who is or is not receiving mortage
credit to determine if discrimination is
being practice in this vital loan area
COMMUNITY
REINVESTMENTS ACT
Intended to incentivize state-
regulated financial institutions to 2. OUTLAWING CREDIT
provide access to credit for low- and
DISCRIMINATION
moderate-income communities and
communities of color in an equitable
and comprehensive manner.
Designed to prevent a lender from
arbitrarily
PREDATORY LENDING AND
SUBPRIME LOANS
Predatory lending typically means
2. OUTLAWING CREDIT
imposing unfair, deceptive, or
abusive loan terms on borrowers,
carry high fees and interest rates, DISCRIMINATION
strip the borrower of equity.
Usually consists of granting
subprime loans to borrowers with
below-average credit records
Real Estate Loans
the average size of real estate loan
BIGGER SIZE is usually much larger than the
average size of other loans,
especially among consumer and
small business loans.
LONGER certain mortgage loans, mainly on
MATURITY single-family homes, tend to have
the longest marturities (from about
15 to 30 years) of any loan made
MAKING
LOAN the condition and value of the
DECISION property that is the object of the Differences between
loan are nearly as important as the
borrower’s income
Real Estate Loans and
Other Loans
The amount of the down payment planned by
the borrower relative to the purchase price of
mortgaged property
Real property loans should be viewed in the
FACTORS IN context of a total relationship between borrower
and lender
EVALUATING Home mortgage loans require the real estate
APPLICATIONS loan to assess the following aspects of each
credit application:
FOR REAL Amount and stability of the The outlook for real
ESTATE LOANS borrower’s income
The borrower's available savings
estate sales in the
local market area in
and where the borrower will obtain case the property
the required down payment must be repossessed
The borrower's track record in The outlook for
caring for and managing property market interest rates
HOME
A home equity loan is a consumer
loan allowing homeowners to EQUITY
borrow against the equity in their
home. Homeowners whose
residence has appreciated in value
can use the equity in their home -
LENDING
the difference between a home’s
estimated market value and the
amount of the mortgage loans Two main types of home equity
against it - as a borrowing base
loans are in use today:
traditional home equity loan
lines of credit against a
home’s borrowing base
Pricing Consumer
and Real Estate Loans
DETERMINING THE RATE OF INTEREST AND
OTHER LOAN TERMS
1. THE INTEREST RATE ATTACHED TO NONRESIDENTIAL CONSUMER LOANS
THE COST-PLUS MODEL
Cost-plus loan pricing is figuring the rate of interest
on a loan by adding together all interest and
noninterest costs associated with making the loan
plus margins for profit and risk.
Loan rate paid by consumer = Lender’s cost of raising loanable fund
+ Non Funds Operating cost
+ Premium for Risk of Customer default
+ Premium for term risk with a longer-term loans
+ Desired profit margin
ANNUAL PERCENTAGE RATE
The annual percentage rate (APR) is the internal rate of
return (annualized) that equates expected total payments
with the amount of the loan. It takes into account how fast
the loan is being repaid and how much credit the customer
will actually have use of during the life of the loan.
ANNUAL PERCENTAGE RATE
Example: Suppose a consumer borrows $2,000 for a year,
paying off the loan in 12 equal monthly installments,
including $200 in interest. Each month the borrower
makes a payment of $183.33 in principal and interest
ANNUAL PERCENTAGE RATE
Nper Required. The total number of payment periods in an annuity.
Pmt Required. The payment made each period and cannot change over the
life of the annuity.
Pv Required. The present value — the total amount that a series of future
payments is worth now.
Fv Optional. The future value, or a cash balance you want to attain after the
last payment is made. If fv is omitted, it is assumed to be 0 (the future value
of a loan, for example, is 0). If fv is omitted, you must include the pmt
argument.
Type Optional. The number 0 or 1 and indicates when payments are due.0 is
for the payments which are due at the end of the period. 1 is for the
payments which are due at the beginning of the period
ANNUAL PERCENTAGE RATE
Plugging the inputs and we have the periodic interest rate as below:
The rate calculated is 1.497% per month, which equates to an APR of
1.497 x 12 = 17.96%
SIMPLE INTEREST
This approach, like the APR, adjusts for the length of
time a borrower actually has use of credit.
If the customer is paying off a loan gradually, the
simple interest approach determines the declining
loan balance, and that reduced balance is then used
to determine the amount of interest owed.
Interest Owned = Principal x Rate x Time
SIMPLE INTEREST
Example : Suppose the customer asks for $2,000 for a
year at a simple interest rate of 12%. If none of the
principal of this loan is to be paid off until the year end,
the interest owed by the customer is:
I = $2,000 x 0.12 x 1 = $240
At maturity the customer will pay the lender $2000 in
principal plus $240 in interest which is $2,240 in total.
SIMPLE INTEREST
Now assume instead that the loan principal is to be paid off
in four quarterly installments of $500 each.
Total payments due will be:
First quarter:
$500 + $2,000 x 0.12 x 1/4= $ 560
Second quarter: With simple interest,
$500 + ($2,000 - $500*1) x 0.12 x 1/4= $ 545 the customer saves
Third quarter: on interest as the
$500 + ($2,000 - $500*2) x 0.12 x 1/4= $ 530 loan approaches
Fourth quarter: maturity.
$500 + ($2,000 - $500*3) x 0.12 x 1/4= $ 515
Total payment due: = $2,150
THE DISCOUNT RATE METHOD
Under this approach, interest is deducted first and the customer receives
the loan amount less any interest owed with the eventual amount of
interest payable already deducted from the payment. To be easier to
understand, the discount rate method requires the customer to pay
interest up front
THE DISCOUNT RATE METHOD
Example, a borrower may agree to borrow $10,000 of funds under
the discount rate method at a 5% interest rate for one year, which
means that the lender lends only $9,500 to the borrower. But
eventually, the borrower still has to pay the initial $10,000. The
borrower’s effective loan rate is now $500/$9500 = 5.26%
THE ADD-ON LOAN RATE
METHOD
Interest owed is added to the principal amount, then the
loan payments are calculated by dividing this sum by the
number of loan payments
RULES OF 78S
A rule of thumb to determine exactly how much interest
income a bank is entitled to accrue at any point in time
from an installment loan being paid monthly. It is often
used by short-term installment lenders who provide loans
to subprime borrowers.
The rule of 78s arises from the fact that the sum of the
digits 1 through 12 is 78
THE ADD-ON LOAN RATE
METHOD
Say a borrower obtains a $2,000 loan at an 17.96% add-on
interest rate that is to be repaid over one year.
The amount of principal to be paid each month would be
$166.67 ($2,000 / 12 months).
The amount of interest owed each month would be
$29.93 ($2,000 x 0.1796 / 12).
The borrower would be required to make payments of
$196.6 each month ($29.93 + $166.67).
The total interest paid would be $359.2
(which is $2,000 x 0.1796).
RULES OF 78S
For instance, suppose a consumer requests a one-year
loan to be repaid in 12 monthly installments, but is able to
repay the loan after only 8 months. Since he has paid
12/78 of the total interest in the first month, 11/78 in the
second month, 10/78 in the third month, etc., he would
be entitled to receive back as an interest rebate:
of the total finance charges on the loan. The lender is
entitled to keep 87.18% of those finance charges.
Pricing Consumer
and Real Estate Loans
DETERMINING THE RATE OF INTEREST AND
OTHER LOAN TERMS
2. INTEREST RATES ON HOME MORTGAGE LOANS
FIXED-RATE MORTGAGES
(FRMS)
Locks in the borrower’s interest rate over the life of the
mortgage.
A financial institution that holds fixed-rate mortgages
is exposed to interest rate risk because it commonly
uses funds obtained from short-term customer
deposits to make long term mortgages.
Borrowers with fixed-rate mortgages do not suffer
from rising rates, but they do not benefit from
declining rates (unless they refinance)
ADJUSTABLE-RATE MORTGAGES
(ARMS)
Allows the mortgage interest rate to adjust to market
conditions.
Contract will specify a precise formula for adjustment.
Some ARMs contain a clause that allows the borrower
to switch to a fixed rate within a specified period.
Whether a customer takes out an FRM or an ARM, the loan
officer must determine what the initial loan rate will be
and, therefore, what the monthly payments will be.
ADJUSTABLE-RATE MORTGAGES
(ARMS)
We can also compute this in Excel through its available
financial formula:
Rate Required. The interest rate for the loan.
Nper Required. The total number of payments for the loan.
Pv Required. The present value, or the total amount that a series of future
payments is worth now; also known as the principal.
Fv Optional. The future value, or a cash balance you want to attain after
the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that
is, the future value of a loan is 0.
Type Optional. The number 0 (zero) or 1 and indicates when payments are
due. If type is omitted, it is assumed to be 0 (zero), that is, the payments
are due at the end of the period. 1 is for the payments which are due at the
beginning of the period.
ADJUSTABLE-RATE MORTGAGES
(ARMS)
For example, let’s calculate the monthly mortgage payment
for a $50,000, 25-year mortgage loan calculated at the fixed
rate of 12 percent.
ADJUSTABLE-RATE MORTGAGES
(ARMS)
Suppose we switch to ARM, the initial loan rate for ARM is also
12 percent. However, after 1 year, the mortgage loan rate rises
to 13 percent beginning with the 13th monthly payment. Now
the principal after 12 monthly installments is no longer
$50,000. We recalculate it in Excel
ADJUSTABLE-RATE MORTGAGES
(ARMS)
The rate, nper, pv are the same concepts as in the previous but the pv now
needs to be a positive figure or it will fail to run the formula.
Start_period Required. The first period in the calculation. Payment
periods are numbered beginning with 1.
End_period Required. The last period in the calculation.
Type Required. The timing of the payment. 0 is for the payments which
are due at the end of the period. 1 is for the payments which are due at the
beginning of the period
CHARGING THE CUSTOMER
MORTGAGE POINTS
There are two types of points:
Discount points lower your mortgage rate by a certain
percentage. When you buy discount points, you're paying
interest up front in exchange for a lower interest rate on your
mortgage. Because discount points are prepaid interest,
they are deductible as mortgage interest on a main home or
second property that's not being rented out.
Origination points are charged by lenders to cover loan
processing costs. Sometimes they'll also include fees for
appraisals, inspections, title, attorneys, notaries, and real
estate taxes. Origination points aren't deductible on non-
rental property.
CHARGING THE CUSTOMER
MORTGAGE POINTS
For example, suppose the borrower seeks a $100,000 home
loan and the lender assesses the borrower an up front charge
of 2 points (2 percent of the mortgage loan). In this case the
home buyer’s extra charge would be:
The
Consumer Loans in
Vietnam cases
1. THE CURRENT SITUATION OF VIETNAM’S CONSUMER
FINANCE MARKET RECENTLY
1. 1. MARKET SIZE, GROWTH, SEGMENTATION
Total outstanding loans :
The entire system had 84 credit
12,749 trillion VND
institutions implementing consumer
Consumer credit: 2,703 trillion
credit activities, including 15
VND, 21.2% of total outstanding
consumer finance companies
loans to the economy
1. 2. TYPES OF CONSUMER FINANCE PRODUCTS
Due to the usage of the loan, consumer finance products are
also comprised of:
residential consumer loans
non-residential consumer loans
credit card loans
1. 2. TYPES OF CONSUMER FINANCE PRODUCTS
Source: FiinResearch
1. 3. MARKET SHARE
At the moment, the Vietnamese CF market comprises a total of 15 Fincos
(financial companies), all licensed and regulated by the State Bank of
Vietnam (SBV). However, nearly 70% of the market is shared by three main
players: FE Credit, Home Credit, and Mcredit.
1.4. VIETNAM’S REGULATORY ENVIRONMENT
FOR CONSUMER FINANCE SECTOR
On December 30, 2016, the State Bank of Vietnam issued Circular
39/2016/TT-NHNN regulating lending activities of financial institutions,
foreign bank branches for customers, and Circular 43/2016/TT-NHNN
regulating consumer lending activities of financial companies.
To address limitations related to the rights of consumer borrowers in the
development process of consumer financial activities, Circular
18/2019/TT-NHNN, issued on November 4, 2019, amended and
supplemented certain provisions of Circular 43/2016/TT-NHNN dated
December 30, 2016
1.5. RISKS IN CONSUMER LENDING ACTIVITIES
Credit risk: the bad debt ratio in consumer credit throughout the system tends to
increase, approximately 3.7% of total consumer credit balance, while from 2018 to
2022, this bad debt ratio only above/below 2%
Interest rate risk: particularly relevant for adjustable-rate mortgages (ARMs). If interest
rates rise, the monthly payments on an ARM will increase, which can make it more
difficult for borrowers to make their payments.
Theriskassociatedwithcustomerinformation
Changes in shopping habits, payment methods, coupled with the continuous
developmentoffintechstartups,alsoposeriskstotraditionalcreditinstitutions
1.6. SUBJECTS IN THE CONSUMER FINANCIAL
MARKET
Consumer credit granting institutions:
There are approximately 16 financial companies providing consumer lending
services nationwide, with market concentration in four major financial companies:
FE Credit, Home Credit, HD Saison, and Prudential Finance; Fintech companies
Informal credit systems and organizations: provide credit and lending services
outside the regulation and supervision of financial and monetary management
authorities
1.6. SUBJECTS IN THE CONSUMER FINANCIAL MARKET
Consumer borrower: Divided into the following 2 main groups: prime borrower and
subprime borrower.
Commercial banks Financial companies Fintech companies
For the prime borrowers For subprime borrowers
who meet required
standards as: who do not quality for
The income is 5 million prime loan: For borrowers who
dong or higher, has an Relatively lower income apply for low value
official labor contract or does not have income cash loans but need it
and is still in force for at (students,...) can not fast and be provided at
least 6 months. prove the income (free- any time. The firm
Have a good credit
history, do not incur lancer,...) connects the lenders
outstanding debt in the High existing debt or and borrowers through
last 12 months, do not low credit point online apps, which is a
incur bad debt in the last Can make only a small kind of P2P lending.
24 months at any down payment
financial institution
The
Consumer Loans in
Vietnam cases
2. CHALLENGES AND FUTURE TRENDS OF VIETNAM’S
CONSUMER FINANCE MARKET
2.1. CHALLENGES
Asset Quality Fierce Regulatory
Declination Competition Constraints
difficult to increase the the legal framework is
it is inevitable that the taking an increasingly
scale of consumer
number of startups rigorous and cautious
finance if asset quality
and enterprises stance, but can
is at risk of declining
wishing to break into negatively affect the
due to customers’
this playfield will burst scope of operations
vulnerability to the
in the next few years to and profitability of
impact of Covid-19
come
pandemic financial companies.
2.2. TRENDS AND DEVELOPMENTS THAT WILL
DRIVE THE MARKET IN THE UPCOMING TIME.
Buy now, pay later (BNPL) is poised to thrive as a new
customer acquisition & retention channel.
Pawnshops’ activities flourished posing fierce
competition to mainstream CF providers.
M&A may heat up again with potential targets.
2.3. RECOMMENDATIONS FOR DEVELOPING
VIETNAM'S CONSUMER FINANCE MARKET IN
THE FUTURE
For SBV:
Improve legal regulations on consumer finance
Support credit institutions to improve technical infrastructure and
customer data
Improve people's awareness and personal financial management
skills
2.3. RECOMMENDATIONS FOR DEVELOPING
VIETNAM'S CONSUMER FINANCE MARKET IN
THE FUTURE
For credit institution system:
Establish affiliated consumer finance companies to exploit the low-
income customer segment
Increase product specialization and simplify lending procedures
Increase investment in technology to prevent risks
Consumer loans play a crucial role in
shaping individual financial journeys.
Recognizing the dynamics of these
CONCLUSION loans empowers both borrowers
and lenders to foster a healthy and
responsible financial environment.
Group 3
THANK
YOU
PRESENTATION
