In the borrowing and lending process of loans the one lender has to be trustworthy as well along with the borrowers. Giving out loans was started by banks officially and that is why they are the most trusted and reliable source of loans to date. Although today several other lending institutions have also emerged bank financing remains as the most obvious choice of source when it comes to taking loans. The reason behind this trust could be their experience and also the transparency of policies and the way in which these policies are clearly communicated to the borrower.
Banks today deal in all sorts of loans such as bank loans to individual borrowers and banks loans to institutions and businesses etc. Banks also deal in the two broad categories of loans: secured loans and unsecured loans. Secured loans are guaranteed to be paid back and a property such as a house is used as collateral. The loan is typically decided according to the value of the collateral.
Typically the loan will not equal the entire value of the house but may be around 60 to 80% of the value of the house. In case of default in paying back the loan the bank can sell the property off to recover the money that they loaned to the owners of the property. The interest rates for secured loans are lower then the unsecured loans. The bank interest rates for unsecured loans are high because the bank has no security or guarantee that the loan will be paid back. Typical examples of secured loan is mortgage banking by the bank in which the house being financed is used as a collateral and car finance is also a similar secured loan example.
In the event of default in paying back the loan taken to buy the house or the car the house or the car is confiscated by the bank after a few warnings. An example of unsecured loan would be credit cards which are more fitted to the debt category but are still a short term loan. Bank rates may be higher for such unsecured loans. Another event in which the bank rates will be higher is if you have a bad credit rating.
The credit banking side of the financial banks deals in credit lines to businesses called the corporate credits and individual personal credits like credit cards etc. Credit banking rates vary from customer to customer. Several banks now offer affordable credit solutions to small businesses but at higher interest rates than they do to most established companies. Banks consider several factors when extending a bank loan to businesses.
Some common factors include whether or not the business has a checking account with that particular bank, the credit history of the owner (in case of private firm) and the company’s credit history, and the business performance and life span of the company. Similarly, the credit card limits vary from person to person based on their credit rating. Credit card payment records also have an effect on the credit rating although they are not considered important by most people. Loans to small businesses and credit cards are usually unsecured loans.
Unlike typical banks business does not come easy in mortgage banking. Mortgage banks are entities that are licensed to give out mortgage loans. They can also be called a home loan bank when dealing with house mortgage specifically. But it is not just houses that they deal in. Mortgage banks offer specialized mortgage loans to consumers and these are licensed institution constituted to cater to this need. As consumers do not deposit any money in mortgage banks they can not earn from this source and hence, require other secondary sources of income.
Operations of mortgage banking are governed by the state laws of the state that they are operating in. As these banks service only mortgage loans they have to stay very competitive to keep the business up and like general banking they can not rely on other departments to cover for the losses or the bad business in a particular month. It is becoming a trend for mortgage banks to only create a loan and earn from it and later sell it off to a mortgage servicing company which will pay the bank for the loan and then service the loan for the borrower and earn from its servicing till the borrower keeps the loan.
An investment bank would usually help companies, governments or individual investors in raising money and investing etc. These banks also advice these entities regarding their business decisions and investment options etc. Apart from financial banking and banks loan side of the banks investment banking usually deals with consultancy and advisory mainly. Investors dealing on behalf of the investment bank and dealing with the customer’s money try to get the best out of his trading decisions and tries to get the best bank rates. An investment bank is typically divided into three parts: front office, middle office, and back office.
The main interaction of the bank is with the capital market after the client where they buy and sell securities through traders. In investment banking the main services are helping clients raise funds and advisory services regarding mergers and similar business decisions. Bank financial aspect deals with corporate finance. Sales or trading constitute the basic revenue for the investment banks. These banks also have a research division which analyzes the buy and sell aspects of various companies.
This division does not contribute anything to the revenues but the information that the division collects can help in many strategic decisions like the mergers and acquisitions advice that the bank services its clients in. Several products have been floated in the market by investment banks to facilitate their clients and new products are being added to their portfolios as the needs of the people seeking services of these banks change. Pension, mutual and hedge funds are some of the products of an investment bank among other products. An investment bank also monitors and works around different level risks to get to a profit trade for their client.