Types of Bank Loans
Banks offer portfolios of business and corporate loans as well as personal loans, including auto and credit card loans.
Bank loans may be described by type, purpose, and maturity. Bank loans are priced according to the bank's cost of funds plus a premium for the credit of the borrower and the maturity of the loan. In addition there are some upfront fees called origination fees that must be paid. In addition, there are commitments for loans that may never be drawn called lines of credit. Bank loans are usually variable rate loans that change as the bank's cost of funds varies. These loans are reset on a regular quarterly or monthly basis. The many types of bank loans represent the bulk of a bank's earnings.
The Bank Personal Loan Portfolio
All banks, especially local, community banks, loan for personal use. Personal loans are a type of loan guaranteed by an individual. Personal loans usually refer to the type of loan necessary to consolidate many smaller debts, for minor home improvements, college and home repair,automobile purchase, house improvements and additions. For excellent bank customers, an unsecured line of credit may be possible with high fees for their use. Credit card loans are also part of a bank personal loan portfolio. The key issue is the source of payment.Usually this is the guarantee of the individual and possibly collateral from the product purchased.
Commercial Loan Portfolios
All banks have commercial loan portfolios. Types of commercial loans include lines of credit for cash flow needs such as payroll and taxes, loans for expansion including purchasing buildings, equipment and materials, and loans for trade guaranteed by the receipts of the products shipped. Commercial loans are by far the most important type of loan source for medium and large banks. Commercial loans may also be extended for government assisted programs such as the Small Business Administration. Commercial loans are almost always guaranteed by a source of collateral such as a mortgage on a building purchased and perhaps the guarantee of the company and even key employees of the company.
Government Loan Portfolios
Government loan portfolios may be made to state and local authorities and indirectly to the federal government through the purchase of treasury bills, notes, and bonds. Loan types include basic governmental functions such as water and sewer projects, state and county maintenance, construction and payroll. This type of loan origination is usually in the 5 to 15 year range with regularly scheduled payments of interest and principal. Often, depending on the size of the loan a consortium of banks and other lenders may participate. If the bonds are declared as tax exempt from federal taxes the bank may treat the loan as a type of municipal bond loan. Loans to non-profit organizations would also be considered as a type of government loan portfolio.
Large international banks lend to international organizations, corporate entities, and other countries. This type of loan is usually large and complex in nature. The bank must take on credit risk and currency risk unless the loan is denominated in dollars. Loan purposes are for development and cash flow and usually mature in no more than ten years. These are lucrative loans because only a few institutions are large enough to mediate the risk involved.
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