Business and

Consumer
Loan
This module will illustrate the conceptual and computational know-how about business
and consumer loans. You will be able to understand the definitions of and the
differences between business and consumer loans. Moreover, you will be solving real-
life problems involving business and consumer loans, and how these financing options
affect the financial decision-making process of a company or an individual.

What is the difference between bonds and loans?

The main difference between a bond and loan is that a bond is highly tradeable. If
you buy a bond, there is usually a market where you can trade bonds. Loans tend to
be agreements between banks and customers. Loans are usually non-tradeable, and
the bank is obliged to see out the term of the loan.

An example of a debt instrument is a bond. It is a method for a business or

government to raise funds by offering what are essentially IOUs (I owe you) with
yearly interest payments.
Another type of debt instrument is a loan, which is often given by a private bank
and has a variable interest rate.

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 Identify whether the following is business or consumer loan:

Example1. Mr. Agustin plans to have a barbershop. He wants to borrow some money
from the bank in order for him to buy the equipment and furniture for the barber shop.

In example 1 above, The answer is business loan. What is business loan? A business
loan is a loan specifically intended for business purposes. As with all loans, it involves
the creation of a debt, which will be repaid with added interest.

A business loan is borrowed money that businesses use to cover costs they can't
afford on their own. While some companies use borrowed money to pay for office
supplies, inventory, or business projects, some business owners utilize business
loans to pay for salaries and wages while their new company is still in the planning
stages. Business owners must ensure that they have a detailed plan for how the
money will be used because lenders want to know how the business intends to use
the borrowed funds. It can be used to launch a business or to grow an existing one.

There are different types of business loans. The following are the types of
business loans in the Philippines:

1. Corporate loan - a loan being availed by top corporation whose purpose is to

finance their projects or expand their respective business.

(In the Philippines, these are usually the top 1 000 corporations.) Corporations are
usually provided by the banks with credit line depending on their size, liquidity,
profitability and other factors deemed by banks as necessary.

2. Commercial loan - a loan being availed by commercial businesses that are not
as big as the top1 000 corporations.

These commercial businesses are leveraging the value of loans for the growth and
financing of their respective businesses.

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3. SME(Small and Medium Enterprises)loan - a loan being availed by SMEs
which are usually entrepreneurs or start-up businesses. They usually use the funds
for their capital and operational expenditures.

Some banks even established a microfinance subsidiary to cater to the unbanked

(those who do not have a bank account) and the under-banked (those who have
accounts but do not maximize their use) to help boost the economy.

Banks are considered the primary lenders to the types of business mentioned above.
Philippine banks have segmented their loan organizations according to the type of
business customer they serve.

banks have a Corporate Banking Unit, Commercial Banking Unit, or SME Loans
Unit. They basically have the same function, but it gets more complex depending
on the type of business customer they are catering.

The following collaterals are usually being accepted by Philippine banks for business
loans aside from the company’s financial and industrial conditions.

1. Investment in government securities and stocks

2. Different forms of real state
3. Deposit accounts with loan provider and other banks
4. Standby letter of credit
5. Updated financial statements

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Example 2. Mr. De Villa wants to have improvements of their 12-year old house. He
wants to build a new room for their 10 year old daughter. He will borrow some money
from the bank to finance this plan.

The answer is consumer loan. What is consumer loan? A consumer loan is a loan
given to consumers to finance specific types of expenditures.

In other words, a consumer loan is any type of loan made to a consumer by a

creditor. The loan can be secured (backed by the assets of the borrower) or
unsecured (not backed by the assets of the borrower).Money lent to an individual
for personal or family purpose. Lending to retail customers or individuals is not
much different from business loans. In the context of marketing, it is just a matter
of segmentation in which the loan product features are geared toward the
demographics, psychographics, and behavior of the primary target market.

Secured vs. Unsecured Consumer Loans

Secured consumer loans - Are loans that are backed by collateral (assets that
are used to cover the loan in the event that the borrower defaults). Secured loans
generally grant the borrower greater amounts of financing, a longer repayment period,
and a lower charged interest rate.

As the loan is backed by assets, the risk faced by the lender is reduced. For
example, in the event that the borrower defaults, the lender would be able to take
possession of collateralized assets and liquidate them to repay the outstanding
amount.

Unsecured consumer loans - Are loans that are not backed by collateral.
Unsecured loans generally grant the borrower a limited amount of financing, a shorter
repayment period, and a higher charged interest rate.

As the loan is not backed by assets, the lender faces increased risk. For example,
in the case of borrower default, the lender may not be able to recover the
outstanding loan amount.

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The following are the types of consumer loans in the Philippines:
1. Housing or mortgage loan-one of the most common retail loan products as all
banks offer this type of loan. A house is a type of real property. Real state or real
property is defined as land plus all the permanent improvements to the land.

The purpose of a mortgage loan is to finance a new house and lot or a condominium
unit for residential purposes. Banks usually just lend a percentage of the market
value of the loaned housing or condominium unit. Common housing loan approval
in percentage ranges from 60% to 90% of the selling price of the house and lot or
condominium unit.

2. Auto or car loan- another common loan product wherein the purpose of the
loan is to finance a brand-new car or a second-hand car.

Almost the same rules are applied to a car loan except that the loan term is usually
shorter compared to a housing loan (ranging 3 to 5 years).

3. Salary or personal loan- a loan product being offered to employed individuals.

Here, the collateral is the contract of employment.

Banks usually have salary loan arrangements with their corporate customers.
Terms are shorter which usually range from 1 to 3 years.

4. Credit card- a credit facility that major banks are offering to qualified
individuals or corporations. This card can provide the retail or corporate customers
with a credit limit that they can use for daily expenses and other major purchases

When availed, interest is way higher than housing or auto loans. Interest rates for
credit cards in the Philippines range from 3% to 5% per month or 36% to 60% per
year.

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The following collaterals are required before a retail customer can avail of a
particular type of loan:
• House and lot loan- Transfer Certificate of Title
• Condominium loan- Condominium Certificate of Title for Housing
• Car loan- Official Receipt/Certificate of Registration OR/CR)
• Salary loan, personal loan, and credit card- employment contract, pay slips,
and Income Tax Return. These loans are considered unsecured since the
lender has nothing to get if the borrower defaults, unlike collaterals which are
considered as assets.

Consumer credit is the term used for a type of loan that is offered to business
and individuals or other retail customers.

These loans are usually paid through a series of regular payments or

installment with imputed interest. The repayment of a loan in equal installments that
are applied to the principal and interest over a period of time is called the
amortization of a loan.

In a loan transaction, there are four factors that need to be considered:

1. Cash price- the price paid all at once at the time of the purchase
2. Down payment- fractional payment to the loan
3. Amount financed- total amount granted by the lending institution to pay off the
balance
4. Installment price- includes all instrument payments, finance charges, and
down payment

You also need to be familiar with the 5Cs of Credit to understand the criteria that
lending institutions follow to assess the credit worthiness of a borrower. The following
criteria help lenders methodically decide on whether to grant a loan to a business or
retail customer:
1. Character- In this area, the lender is looking for such things as credit history,
training and knowledge, experience, financial competency, and plans for the
future. In short, the character is the reputation of the borrower.

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2. Capacity- This refers to the ability to service the debt, replace assets as they
wear out and provide money for living and possible expansion. In short, capacity
is the ability of the borrower to repay a loan by assessing the income against the
debts of the borrower.
3. Capital- This is what is left behind a borrower when the liabilities are deducted
from the assets.
4. Collateral- This serves as a loan transaction's security for the lender.
5.Conditions- These are the commercial terms of a loan transaction such as the
principal amount, interest rate, and the term of the loan.

Activity 1: SME (Small and Medium Enterprises) Loan: Installment

Franco Tristan Remittance Business, a start-up business, purchased 30 laptops
installment plan to support its remittance operations group with a ₱100 000
down payment and 12 monthly payments of ₱80 000.
1. What is the installment price of the 30 laptops?
2. How much interest rate was imputed if the cash price of the 30 laptops is ₱900
000?
3. How much is the interest that the business paid per month?
4. How much from the principal loan was deducted per month?
Solution:
1. Apply the following formula in getting the installment price:
Installment Price= Total of Installment Payments + Down Payment
=(12x₱80 000) + ₱100 000
= ₱960 000 + ₱100 000
= ₱1 060 000
2. Apply the following formula in getting the interest rate: I=PRT
I=₱1 060 000(Installment Price) - ₱900 000(Cash price) = ₱160 000
₱160 000 = (900 000-100 000)(R) (1 year)
I = P R T
R = ₱160 000
₱ 800 000
R = 20%
You can verify the answer by substituting the values in I = PRT:
₱160 000 = ₱800 000(20%)(1year)

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3. Apply the following formula in getting the monthly interest payment:
I = PRT

I= ₱13 333.33
4. Apply the following formula in getting the amount of principal paid per month:
Monthly Payment-Monthly Interest Payment = Principal Paid per Month
₱80 000 - ₱13 333.33 = ₱66 666.67

Activity 2: Corporate Loan

AMDDC Corporation, a real estate company, is one of the top 1 000 corporations
in the Philippines. It has a ₱500 000 000 credit line with the Global Filipino Bank.
The annual percentage rate (APR) charged on the account is the current prime
rate plus 5%. There is a minimum APR on the account of 10%. The starting
balance on 1 June 2019 was ₱50 000 000. On 9 June 2019, AMDDC Corporation
borrowed ₱20 000 000 to finance one of its projects in Santa Rosa City. On June
20, AMDDC made a ₱60 000 000 payment on the account. On June 26, AMDDC
borrowed ₱50 000 000 to finance its operating and capital expenditures. The
billing cycle for June has 30 days. If the current prime rate is 8%, what is the
finance charge on the account and what is AMDDC Corporation’s new balance?
Solution:
To solve this problem, you need to find the following: (a) annual percentage rate, (b)
periodic rate, (c) average daily balance, (d) finance charge, and (e) new balance.
a. Annual percentage rate (APR): The annual percentage rate is prime plus 5%, with
a minimum of 10%. Because the current prime rate is 8%, the APR on this line of credit
is 13% (8% + 5%). b. Periodic rate:
Periodic Rate = Annual Percentage rate
12 months

c. Average daily balance:

Dates Number Activity/amount Unpaid Daily Balance
of Days Balance (unpaid balance x
days)
1-8 June 8 Previous balance ₱50 000 000 ₱400 000 000

9-19 11 Borrowed ₱20 000 000 ₱70 000 000 ₱770 000 000
June
20-25 6 Paid ₱60 000 000 ₱10 000 000 ₱60 000 000
June

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26-30 5 Borrowed ₱50 000 000 ₱60 000 000 ₱300 000 000
June

Total 30 days ₱1 530 000 000

= ₱51 000 000

d. Finance charge:
Finance Charge = Average Daily Balance x Periodic Rate
=₱51 000 000 x 1.083%
= ₱552 330
e. New Balance:
New Balance = Previous Balance + Finance Charge + Loan Amount – Payments
= ₱50 000 000 + ₱552 330 + ₱70 000 000 - ₱60 000 000
= ₱60 552 330

Activity 3: Credit Card: Installment

Bonifacio Bank’s credit card zero-percent installment price of a phablet was ₱38
000 for a 12-month loan. If a ₱5 000 down payments was made, find the
installment payment.
Solution:
Apply the following formula:
Installment Price (IP) = Total of Installment Payments + Down payment
Total of Installment Payments = IP-Down Payment
= ₱38 000 - ₱5 000
= ₱33 000
Therefore, the installment payment (per month) is ₱33 000 ÷ 12 = ₱2 750

Activity 4: Loan-to-Collateral Ratio

Your dad wants to purchase a new house and lot in Laoag City, so he decided
to apply for a housing loan from the Bank of Vigan using his existing house and
lot as collateral. The bank conducted an appraisal of his existing house and lot
and came up with a ₱2 000 000 appraised value. Your dad will pay the developer
20% down payment. The fair market value of the new house and lot is ₱1 500
000. What is the loan-to-collateral ratio?
Solution:
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Apply the following formula:
Amount Morgaged

= 60%

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