Chapter 1: Credit Reporting Industry
IN THIS LESSON
Industries we serve
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A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.
There are several types of banks, including retail banks, commercial or corporate banks, and investment banks.
In the U.S., banks are regulated by the national government and by individual states.
Understanding Banks
Banks have existed since at least the 14th century. They provide a safe place for consumers and business owners to stow their cash and a source of loans for personal purchases and business ventures. In turn, the banks use the cash that is deposited to make loans and collect interest on them.
The basic business plan hasn't changed much since the Medici family started dabbling in banking during the Renaissance, but banks' range of products has grown.
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What Is a Credit Union?
A credit union is a financial cooperative providing traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants spanning the country, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.
Credit unions are created, owned, and operated by their members. As such, they are not-for-profit enterprises that are accorded tax-exempt status.
Understanding a Credit Union
Credit unions follow a basic business model. Members pool their money (technically, they are buying shares in the cooperative) to provide loans, demand deposit accounts, and other financial products and services to each other. Any income generated is used to fund projects and services that will benefit the community and the interests of members.
Requirements for Membership
Originally, membership in a credit union was limited to people who shared a common bond. They may have worked in the same industry or for the same company. Or they may have lived in the same community.
However, credit unions have loosened the restrictions on membership and often allow the general public to join.
To do any business with a credit union, you must join it by opening an account there (often for a nominal amount). As soon as you do, you become a member and partial owner.
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A consumer finance company is a specialized financial institution that supplies credit for the purchase of consumer goods and services by purchasing the time-sales contracts of merchants or by granting small loans directly to consumers.
The number of consumer finance or small-loan companies rose in the 1900s. Until then, the need for consumer loans had been met primarily by illegal “loan shark” activities because it was unprofitable for banks to make small loans at rates below legally set usury levels. In 1911 several states in the United States began adopting small-loan laws that authorized loans to consumers at rates above usury levels, making it financially practical to operate a consumer loan business. Today many companies engage both in the sales-finance business and in making loans directly to consumers.
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An indirect loan can refer to an installment loan in which the lender – either the original issuer of the debt or the current holder of the debt – does not have a direct relationship with the borrower.
Indirect loans can be obtained through a third party with the help of an intermediary. Loans trading in the secondary market may also be considered indirect loans.
By allowing borrowers to obtain financing through third-party relationships, indirect loans can help to improve funding availability and risk management. Often applicants who don't qualify for a direct loan can opt for an indirect loan instead. Indirect loans tend to be more expensive – carrying higher interest rates, that is – than direct loans are.
Understanding an Auto Indirect Loan
Many dealerships, merchants, and retailers that handle big-ticket items, such as cars or recreational vehicles, will work with a variety of third-party lenders to help their customers obtain installment financing for purchases. Dealerships often have lending networks that include a variety of financial institutions willing to support the dealership’s sales. Oftentimes, these lenders may be able to approve a wider range of borrowers due to their network relationship with the dealer.
In the indirect loan process, a borrower submits a credit application through the dealership. The application is then sent to the dealership’s financing network, allowing the borrower to receive multiple offers. The borrower can then choose the best loan for their situation. The dealership also benefits, in that, by helping the customer receive financing, it makes the sale. Because the interest rate on the dealer is likely to be higher than from a credit union or bank, it's always best for buyers to check other financing options before agreeing to finance their car through a dealer.
While this sort of indirect loan is often known as "dealer financing," it's actually the dealer's network financial institutions that are approving the loan (based on the borrower’s credit profile), setting its terms and rates, and collecting the payments.
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A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest.
Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.
Seven things to look for in a mortgage
The size of the loan
The interest rate and any associated points
The closing costs of the loan, including the lender's fees
The Annual Percentage Rate (APR)
The type of interest rate and whether it can change (is it fixed or adjustable?)
The loan term, or how long you have to repay the loan
Whether the loan has other risky features, such as a pre-payment penalty, a balloon clause, an interest-only feature, or negative amortization
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Debt collection is the process of pursuing payments of money or other agreed-upon value owed to a creditor. The debtors may be individuals or businesses. An organization specializing in debt collection is a collection agency or debt collector. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.
Historically, debtors could face debt slavery, debtor's prison, or coercive collection methods. In the 21st century, in many countries, legislation regulates debt collectors and limits harassment and practices deemed unfair.
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Retail/Store Credit Card:
Retail cards, also known as store cards or store credit cards, are credit cards issued by specific retailers or stores. These cards are designed for purchases within the issuing store or a group of affiliated stores. Retail cards often come with special discounts, rewards, and exclusive offers for cardholders. However, they typically have higher interest rates compared to regular credit cards. It's important for consumers to carefully consider the terms and fees associated with retail cards before applying for one.
Audiences
Consumer
Universally used to describe the end user, no matter the industry.
Customer
“Customer” is used to describe a bank’s end-user.
Banks and Credit Union Products
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What is an installment loan?
Installment loans are closed-ended debt products, which means you receive the loan proceeds at once and pay what you borrow in monthly installments over a preset loan term.
Installment loans are a handy personal finance tool if you’re looking to pay off sizable debts in small, manageable chunks.
The most common type of installment loan is a personal loan, but other examples of installment loans include no-credit-check loans, mortgages, and auto loans.
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What Is a Bank Card?
A bank card is any card issued against a depository account, such as an ATM or debit card. Sometimes the phrase is also used to refer to Visa and MasterCards since banks also issue these, but they are credit cards and not linked directly to a depository account.
Bank cards may be limited in their use; some can only be used at ATM machines or for certain purchases. Most bank ATM cards also require a PIN in order to be used.
How Bank Cards Work
Withdrawals or payments with bank cards will typically result in an immediate corresponding change in the balance of the account on which it is issued. This contrasts with credit cards, which issue statements at monthly intervals with balances that must be paid by a certain date.
Many bank cards are associated with either Visa or MasterCard. Although purchases are debited from deposit accounts, purchases can be made as “credit” anywhere that accepts that Visa or MasterCard.
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HELOC- Home Equity Line of Credit
HELOCs are a revolving source of funds, much like a credit card, that you can access as you choose. Most banks offer a number of different ways to access those funds, whether it’s through an online transfer, writing a check, or using a credit card connected to your account. Unlike home equity loans, they tend to have few, if any, closing costs, and they usually feature variable interest rates—though some lenders offer fixed rates for a certain number of years.
There are pros and cons to the flexibility that credit lines offer. You can borrow against your credit line at any time, but untapped funds do not charge interest.
In that way, it’s a nice emergency source of funds (as long as your bank doesn’t require any minimum withdrawals). If, for example, you've lost your job, need cash, and have equity in your home, taking out a HELOC may be a good option.
The biggest con, again, is that your home serves as collateral for a HELOC. If you're unable to repay your HELOC for any reason, you risk losing the home to foreclosure.
HELOAN- Home Equity Loans
A home equity loan comes as a lump sum of cash. It’s an option if you need the money for a one-time expense, such as a wedding or a kitchen renovation. These loans usually offer fixed rates, so you know precisely what your monthly payments will be when you take one out.
Home equity loans usually aren’t the answer if you only need a small infusion of cash. Though some lenders will extend loans for $10,000, many won’t give you one for less than $35,000. What’s more, you have to pay many of the same closing costs associated with a first mortgage, such as loan-processing fees, origination fees, appraisal fees, and recording fees.
Lenders may require you to pay points—that is, prepaid interest—at closing time. Each point is equal to 1% of the loan value.
So on a $100,000 loan, one point would cost you $1,000. Points lower your interest rate, which might actually help you in the long run.
Still, if you’re thinking about paying off the loan early, that upfront interest doesn’t exactly work in your favor. If you think that might be the case, you can often negotiate for fewer or even no points with your lender.
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AKA- Checking Account
What Is a Demand Deposit?
A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time without advance notice. DDA accounts can pay interest on the deposited funds but aren’t required to. Checking accounts and savings accounts are common types of DDAs.
How Demand Deposits Work
If depositors were required to notify their banks in advance before withdrawing funds, it would be quite a challenge to obtain cash or make mundane transactions. Demand deposit accounts are intended to provide ready money—the funds that people need to make a purchase or pay bills.
The account's holdings can be accessed at any time without prior notice to the institution. The account holder walks up to the teller or the ATM—or, increasingly, goes online—and withdraws the sum they need; as long as the account has that amount, the institution has to give it to them. The money is available "on-demand"—hence, the name "demand deposit" for this sort of account.
Demand deposit accounts, which typically are offered by banks and credit unions, are in contrast to investment accounts offered by brokerages and financial services firms. While the funds may be invested in highly liquid assets, the account holder still must notify the institution that they wish to withdraw money; depending on the asset in question, it may take a day or two for the investments to be sold and the cash to be available.
"DDA" can also mean direct debit authorization, which is a withdrawal from an account to purchase a good or service. It's what happens when you use a debit card. But it's fundamentally the same concept: The money is immediately available, drawn on the linked account, for your use.
Member
“Member” is used to describe a credit union’s end-user.