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PURSE STRINGS: LOANS 101 : Wiles Magazine

PURSE STRINGS: LOANS 101

10 Things About Loans Your Bank Won’t Tell You

by Charles White

 The rich ruleth over the poor, and the borrower is servant to the lender.

~ Proverbs 22:7

When helping customers with their loans and lines of credit, customers will ask a myriad of questions about how loans work and why some of their questions are never answered by their banks. In my role as a consultant, I try to provide as much light as possible to help the average consumer understand the banking system. This would include how banks operate and how credit really works within the banking system. Here are the top 10 answers to the mystery of the banking system.

The Fair Isaac and Company (FICO) score that you see is not the one the bank sees. Fair Isaac and Company has over 54 different types of FICO scores that fall under installment loans, car loans, insurance and other financial instruments. Every FICO is different because there are different risks levels involved in taking on different types of debt. This risk level is different for FICO scores when using Experian, Equifax and Transunion. For the most accurate score, the consumer can either go to www.myfico.com and receive a score or apply for a loan and have the score disclosed to them.

The bank has its own scoring system that is not disclosed to you. Within the banking system there are 7 different types of scores: Revenue score, Behavioral scores, Response score, Transaction score, Collection Score, Bankruptcy Risk Score and an Attrition score. Each score handles a different part of a consumers relation with a bank and with debt. More information on each score can be provided by your bank or by contacting the US Treasury.

The bank uses more than the Experian, Equifax and Transunion databases to evaluate your creditworthiness. According the Consumer Financial Protection Bureau (www.ConsumerFinance.gov) there are over 30 different types consumer databases that banks and other financial companies have access to when they determine a consumer’s credit worthiness. The big three are the ones that are known by most consumers.

Banks will not tell you exactly why you were turned down for a loan. A bank has to only provide you what the cause was for turning you down, ie, a database or lack of income. They do not have to tell the exactly why. With most customers, I tell them to keep the debt low and income high and this will better your chances.

Banks prefer their own customers over you. A bank is in business to make money and to take as few risks as possible. A bank’s best customer is their own customer. With their own customer, the bank has their history and they know their debt level. With a stranger, there are many unknowns. In order to get around this, I suggest that my client, become a customer of a bank before applying for a loan. This would mean opening up a checking and savings account and disclosing other financial information.

National banks loan officers can’t make local decisions about your loan. Most national banks, that are publicly traded, have to report numbers quarterly to Wall Street.  This means that numbers from quarter to quarter, have to be consistent across the board. If you have a loan officer in Iowa, who is making different decisions about loans that are different than someone in Utah, the bank will have inconsistent results. In order to get around this, all branches use the same software so that decisions are consistent and predictable.

Most loans under $100,000 are made by a computerized system. In the same spirit as the previous answer, banks have to have consistency when making loans and lines of credit. What better way to do this than to have a computerized system, based on historical data of past borrowers? Banks use these types of systems to make loans and have predictable results.

Your profession influences your loan chances. My customers will ask about their profession and their ability to get loans. The common knowledge is that most loans are based on income and debt, however different professions such as doctors or attorneys have the ability to access larger amounts of cash than a teacher or truck driver. Why? Because they have a greater ability to raise their income based on their profession. I always advise that my customers talk with the bank first about their profession in reference to their requested loan amounts.

Banks will sell your loan without telling you. Most bank loans are not held by the banks anymore, because the demand to make money on new loans is so great. What a bank will do, after the loan is established, they will sell off the loan and have a contractual agreement with the new holders of the loan to be a servicing agent and collection agent for the loans. The banks does this so that they can get their initial loan balance back and make money on serving that same loan.

Banks can call your loan or cut your credit line at anytime. As the world found out in 2008, banks can call loans in at anytime. Prior to 2008, it was hard to believe that banks would call a loan. I suggest to all of my customers to investigate their banks. What they want to look for is high debt levels, exposure to risky real estate and is the bank a market leader? I ask my customers to ask questions about long term viability with loans. The only bad question is the one not asked.

 

About the Author: Charles White is the president of AAA Data Information, located in Portland, Oregon. He can be contacted at info@aaadatainformation.com

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