Exam 21: Consumer Lending and Borrowing

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Most loan officers carefully consider:
- the ratio of household debt to gross income: there are rules of thumb and statistics concerning how much debt can be handled
- the duration of employment of the borrower: stability
- past payment records: credit integrity
- ownership of valuable properties: these assets can be used as collateral; they also give an indication of the customer's ability to save
- the number of job holders in the family: that probability that two job holders lose their jobs at the same time is lower, so the family is more likely to have some income
- the existence of a telephone line at home: this is an inexpensive way to contact the borrower

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For both convenience users and installment users, the principal advantage of credit cards is convenience. The installment loan feature of the credit card is a major attraction because it functions as a revolving line of credit, granting loans at no cost for an average of about one month by taking advantage of interest-free grace periods. In addition, the card itself serves to identify the customer and makes pertinent information available when the privilege of using the card is exercised.
While a credit card permits the customer to buy now and pay later, debit cards are merely a convenient way of paying now. A debit card enables users to make deposits and withdraws from an automated teller machine and also to pay for purchases by direct electronic transfer of funds from their own accounts to the merchant's account. Debit cards are also used for identification and check-clearing purposes and to access remote computer terminals for information or for moving funds. Many consumers also seem to like the discipline that debit cards bring to their lives, because money is automatically taken out of their accounts. Moreover, with debit cards, the consumer has fewer checks to write.
The disadvantage of a credit card is that the cardholder may overuse the credit line quickly if he or she does not exercise self-control. Unpaid balances on a credit card accumulate interest quickly and add to the burdens of cardholders who tend to overspend. The disadvantages of a debit card include the fact that the debit cardholder may face less protection when the card is lost or stolen. Federal law limits consumer losses on credit cards, but a debit card can be used to drain a customer's checking account before he or she realizes what has happened.