The Bank of Blue Sea uses the following credit scoring system to evaluate consumer credit loan of more than $5,000

Instruction

The Bank of Blue Sea uses the following credit scoring system to evaluate consumer credit loan of more than $5,000.

Criterion                                                        Points

Applicant’s length of employment in his/her present job

More than three years                                                  10

One to three years                                                         6

Less than one year                                                        2

Applicant’s length of time at the current address

More than three years                                                   10

One to three years                                                          5

Less than one year                                                         3

Applicant’s current residence

Home-owner                                                                 10

Renting a unit/home                                                       6

Living with a friend/relative                                          3

Credit rating

Excellent                                                                         10

Average                                                                            5

Below average/no record                                                 3

Deposit account with a bank

Yes                                                                                   5

No                                                                                    2

Active credit cards

One card                                                                           5

Two cards                                                                         3

More than three cards                                                       2

Applicant’s Net assets (Assets – Liabilities)

Between 200,001 and 1,000,000                                      10

Up to 200,000                                                                    5

Applicant has more liabilities than assets                        -5

Borrowings applied for

500,000 or less                                                                  10

500,001 to 1,000,000                                                          5

More than 1,000,000                                                          0

Applicant’s margin towards the loan

0 to 10%                                                                              0

11 to 20%                                                                            5

More than 20 %                                                                 10

Applicant’s Income range ($ p.a.)

Less than 50,000                                                                  2

Between 50,000 and 100,000                                               5

More than 100,000                                                             10

The cut-off score set by the bank for accepting credit application is 50 points.

 

The Smiths are seeking a loan of $25,000 to finance a house renovation project and buy a new air-conditioner with an estimated total cost of $38,000. They plan to cover the remaining balance using their personal funds. The loan will be utilised to buy the new air-conditioner and cover expenses related to the renovation, including materials, labour, permits, and other associated costs.

Mark Smith has been employed as a senior analyst at a financial firm for the past four years. His annual income is $90,000 p.a. Mark’s wife, Emily, works part-time as a freelance graphic designer for two years and earns around $800 per month. They have a one-year-old child, Ethan, who will be attending a local day-care facility. They are currently renting a house for which they pay a monthly rent of $1,500. The family has lived in this house for the past 18 months. Mark and Emily each hold one credit card from different issuers, and their credit report is excellent. They also have investments totalling $10,000 in a diversified portfolio and a Saver account with the bank.

a.       Using the given credit scoring system, evaluate the loan application from the Smiths. Show all workings. Marks will be awarded for each step in the points’ selection process. [15 marks]

b.      Conduct a credit analysis on the applicants using the Five Cs. [15 marks]

Sample Answer (Order for an Original Paper)

a. Evaluating the Loan Application Using the Credit Scoring System:

To evaluate the Smiths’ loan application, we will go through each criterion and assign points accordingly based on the information provided:

1. Applicant’s Length of Employment:
Mark’s length of employment is more than three years, so he gets 10 points.

2. Applicant’s Length of Time at the Current Address:
The Smiths have lived in their current address for 18 months, which is less than three years. They get 3 points.

3. Applicant’s Current Residence:
They are currently renting a house, so they get 6 points.

4. Credit Rating:
The Smiths have an excellent credit rating, earning them 10 points.

5. Deposit Account with a Bank:
They have a Saver account with the bank, so they get 5 points.

6. Active Credit Cards:
Both Mark and Emily have one credit card each, earning them 5 points.

7. Applicant’s Net Assets:
Mark and Emily’s net assets are the sum of their investments ($10,000) and their Saver account balance. As the Saver account balance is not provided, we cannot determine the net assets score.

8. Borrowings Applied For:
The loan amount they applied for is $25,000, which is less than $500,000. They get 10 points.

9. Applicant’s Margin Towards the Loan:
The Smiths plan to cover the remaining balance of $13,000 with their personal funds, which is more than 20% of the loan amount. They get 10 points.

10. Applicant’s Income Range:
Mark’s income is more than $100,000 per year, so they get 10 points.

Now, let’s calculate the total points:

Total Points = 10 + 3 + 6 + 10 + 5 + 5 + Net Assets Score + 10 + 10 + 10 = ?

As we couldn’t determine the net assets score, we cannot calculate the total points accurately. However, based on the points we have assigned, the Smiths are likely to score well above the cut-off score of 50 points, making them eligible for the credit loan.

b. Conducting Credit Analysis Using the Five Cs:

1. Character:
The Smiths’ excellent credit rating, timely payments, and responsible credit card usage demonstrate good character. Their reliable employment history also adds to their positive character.

2. Capacity:
Mark’s annual income of $90,000 indicates that they have the capacity to repay the loan. However, Emily’s part-time freelance income may not be as stable, and they should consider her income carefully while calculating their overall repayment capacity.

3. Capital:
The Smiths’ investments totaling $10,000 and their personal funds contribute positively to their capital position. However, without the exact Saver account balance, we cannot assess their overall capital strength accurately.

4. Collateral:
The loan is intended for financing a house renovation project, which can serve as collateral. However, the air-conditioner purchase may not offer significant collateral value.

5. Conditions:
The Smiths plan to use the loan for a house renovation project and air-conditioner purchase, indicating a specific and feasible purpose for the funds. They should ensure that they can meet the loan’s terms and conditions.

Overall, the Smiths’ credit analysis appears positive, with a stable employment history, excellent credit rating, and a solid income for Mark. However, they should carefully consider Emily’s part-time income and assess their overall financial position, including their exact net assets, to ensure they can comfortably repay the loan.