Consumer loan - certain amount of money, which is borrowed to a natural or legal person without any securitization. In principle they are very often collected by individuals who do not carry out economic activity in small amounts. They are usually used to cover current expenses or small items. Nevertheless, despite the fact that a loan is not secured by any asset, the creditworthiness of the consumer is important. Before receiving any contract, the bank will ask him or her to provide his or her personal data and to indicate the current sources of income. On the basis of the information received, the bank will be able to assess the potential credit risk of providing financial resources to a given person through algorithms prepared by actuaries.
Credit check procedure
The basic procedure for granting consumer credit is to check its credibility and creditworthiness. Under this activity, the Bank collects, among other things, the following data:
- Information on earnings and current employment;
- Type of contract concluded;
- Credit history;
- Information about persons who are able to bear potential liability for the debtor's insolvency.
Most of the data mentioned above are very often collected in central databases, which banks make available to each other within the framework of institutional cooperation. In addition, they shall be available, inter alia, to consumers who wish to verify their creditworthiness before applying for a credit. However, it is worth taking an amendment to the fact that each time a creditworthiness check may lower the index points of a specific entity. Therefore, it is important to treat the institution with a certain degree of caution.
Rules of granting consumer loans
The granting of consumer loans shall be based primarily on the principle of advance payment of the money in question. The consumer receives the full amount from the outset and its disbursement is in no way controlled by the granting authority. However, due to the increased credit risk borne by the bank.
The procedure for granting credit is not particularly complicated. The person concerned shall be required to provide his personal data, to sign a consumer credit agreement and to indicate the bank account number to which the amount is to be transferred. This is intended primarily to counter crimes related to the financing of terrorism and money laundering. If a person were to receive a cash loan, there is a high probability that they would be able to spend it on things related to criminal activities.
The last step in granting consumer credit is to carry out the compliance procedure. It consists in the fact that the lending institution should ensure that the contractual terms of the credit transaction do not contain any prohibited clauses. The undermining of such agreements may render them null and void and therefore require the reimbursement of all benefits received. However, in this case the benefit received will not be a loan with interest, but only the amount of the capital part (without interest part). As a result, not only does the bank expose itself to potential litigation, but it also deprives itself of the opportunity to earn a potential profit on the margin on the interest part of a given loan.
- Cranston R, Avgouleas E. , Van Zwieten K., Hare CH. , Van Sante T., (2018), Principles of banking law Oxford University Press
- Langley P., (2014) Equipping entrepreneurs : consuming credit and credit scores., "Consumption, markets culture."
- Malik M. , Thomas L. C., (2012), Transition matrix models of consumer credit rating, "International Journal of Forecasting"
- M. Malik, L. C. Thomas 2012, pp. 261-272
- P. Langley 2014, pp. 448-467
- R. Cranston, E. Avgouleas, K. Van Zwieten, Ch. Hare, T. van Sante 2018, pp. 210-234
Author: Weronika Brach