Consumer Lending

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Join us for an engaging conversation with Rusty Flynn, Senior Vice President of Retail Lending at AmeriServ Financial Bank. This episode of Bank Chats focuses on consumer lending and lays some common financial misconceptions to rest. Learn about different types of loans, equity, credit reports, and much more.

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This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts, with the goal of helping to take some of the mystery out of financial and related topics; as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast, and any resources available for download from our website or other resources relating to Bank Chats is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial, Incorporated.

Transcript

Fast fact. Money lending can be traced back to about 3000 BC in ancient Mesopotamia. Before currency was widely used, ancient peoples used food as a way to pay their debts. With the promise of harvest in the spring, farmers would borrow seeds, and then share their crops to pay their debts. I'm Drew Thomas, and you're listening to Bank Chats?

Today, we're pleased to have with us, Senior Vice President of Retail Lending at AmeriServ, his name is Rusty Flynn. Hi Rusty, how are you?

Good Drew, how are you?

I'm great. I'm great. So, tell us a little bit about yourself. Tell us a little bit about your background.

I've been lending money for 32 years. I started with a finance company for about seven years, and then over the last 25 years, I've been in community banks, last 17 with AmeriServ.

So, 25 years and community banks. Yeah, it's been a long time. So, we're going to talk a little bit about consumer lending today. When, when someone comes to a bank to ask for a loan, where does that money come from exactly?

The vast majority of our money, our funding sources, come from our depositors. So, we take in deposits, whether it's checking accounts, savings accounts, CDs, generally, what we do is try to turn that money into lending opportunities. And the difference between what you lend out compared to what you have on deposit, that's how we make our money. One of the simplest sources of how, you know, banks make money over a period of time. So banking, at its simplest source, is really it comes down to interest revenue, fee income, or investment income. So, when it really comes down to it, well, what we're trying to do is take loan interest, what we get on our deposits, you lend it out, and the difference is interest revenue. So that's really what it comes down to is a simple source of use our own funds to make money.

So, theoretically, I come in and I deposit you know, we'll use, we'll use vague numbers, I come in, and I deposit $1,000. And I can take my money back anytime, anytime I want, correct? Correct. All right. But, at the same time, you're using some of my money to lend to other people to generate interest is what you're saying. Right?

Absolutely. Who I mean, we're pooling everybody's money in there to generate income for everybody that's involved in a process.

So, it's not that the bank has all this money, right? We're just holding that money and then reallocating it to, out into the community.

Absolutely. I mean, we're reallocating it and the bank has other funding sources too; lines of credit, that we have to cover sources if we would happen to need it overnight, borrowing from the Federal Reserve, and other lending sources, but generally speaking, you know, our first funding source is our deposit base.

Okay. All right. So that makes sense. So, I think a lot of people have the misunderstanding sometimes that the bank is just full of money, and that we just give it out to the people we like the best or something. And that's not really the case. It's the depositors that we have that give us the ability to lend that money back out.

Yeah, absolutely. I think everybody has misconception that the vault has, you know, piles and piles of cash, we're just ready to get out. So yeah, there's limited sources of actually cash on hand. But, you know, at the end of the day, we're trying to lend out what we have on deposit.

Okay. All right. Well, that makes sense. So, what kinds of loans would, would use, like, what's the difference between, for example, a secured and unsecured loan, maybe we just start there.

I'll start on the simplest ones. The unsecured loan is just a personal loan, as somebody who might take out you know shorter term, it's a term loan, a term loan, just means you're taking out a fixed amount of money at a fixed interest rate paying it back over a period of time, okay? So, if you want to take out $5,000, over 36 months, your payments gonna be equal over 36 months, and once it's done, it's paid off, you're down to zero, the loan is gone. Okay? So, a line of credit, on the other hand, is it's a fixed amounts where the bank is going to say, you know Drew, you come in, you apply for $10,000. So, think of it as a credit card, it is a line of credit that you can use over and over again, you're only going to pay interest on what you borrow at any one time, pay it off, you can use it again. You know, it's there as a safety net. I always say credit lines are good for a safety net or for short term borrowings versus long term borrowings. So, you can use it pay it off. Generally speaking, you know, credit lines are going to be variable rate, where installment loans can be a fixed rate. So, variable rate might be something, you know, most loans are tied to prime rates. So, Wall Street Journal prime rate plus a margin. So, that can, and we'll change over time, and we've had a rate rising environment over the last couple of years, so, interest rates have increased dramatically. Whereas the fixed rates you know, generally speaking, are going to be lower than a credit line, because it's a one-time loan, it's fixed and locked in at the time you do the loan, and then it's going to be paid off over a period of time that lessens the risk for the bank. Where a credit line, the risk stays out there for a long period of time, because we're giving you $10,000 access at any one time, whether we know your financial situation, you know, three years from now.

Okay. Yeah, that's a good point. So, in a fixed loan, you're looking at a snapshot of what my financial situation is today. And then you're making a decision whether or not to give me that loan, because you know, in advance how long it's going to take me to pay it back and what the interest rate is, and how much I'm likely to be able to make those payments. But if you give me a line of credit, and I lose my job five years from now, you can't, you can't possibly know that ahead of time. So, that's why the interest rate tends to be higher is what you're saying.

Generally speaking, that's absolutely correct. Because what happens is on a term loan is you're paying it down, our risk is down, because your balance goes down over a period of time. Where if you're at financial struggles over time, generally speaking on credit line, most people are going to tap into those resources, you know, maximize the amount they have borrowed out there. They might be using it to live on and things like that. So, typically a bank is not going to find out that you're having financial problems until probably maxed out that credit line, and then all of a sudden you stop paying or you get past due. So, that's when a bank knows that the risk is a lot higher. And that's why credit lines typically are riskier than term loans.

Okay. Yeah. And that's a good point, you don't realize, the bank doesn't realize that it's an issue until you've racked up a lot more debt on that credit line, because you've basically maxed it out.

Most times the banks are not going to know until it's too late. Because if it's too late for a customer paying on their loan, generally speaking, they probably already have other bills that are past due too, whether it's her house or car, other credit cards. Generally, people pay for their housing first, their car second, and then anything else after that. You gotta keep in mind, people still got to eat, buy groceries, pay insurance and things like that.

Yeah. And I'd like to come back to, to the topic of debt here in a minute. But one of the questions that I wanted to sort of clarify, you mentioned that a line of credit is kind of like a credit card. So, what's the difference?

Generally, I would say a credit card is good to have, especially for people to travel with, or have different things, but credit card interest rates are much higher than what a credit line interest rate at a bank is going to be. So, flexibility of a credit card is, you can use it at any kind of retail or anything like that, just by swiping a card or tapping a card, where a credit line is through your bank, you're gonna get a set of checks where you can do online transfers, or stuff like that. It's going to have more than likely a much lower interest rate. So, the credit line of the bank is still a good choice, it's just offers a little less flexibility, where the credit card is generally accepted. At any kind of retailer where you can use it almost anywhere.

Yeah. And I would have to think too, with a line of credit at your bank, if you need access to cash, that's probably a better option than, than a cash advance on a credit card. Because I know with credit card companies, a lot of times your cash advance interest rate is even higher than your purchase interest rate. So is a credit line the same either way, whether you take out cash or whether you write one of those checks, it's the same interest rate? It's the

same interest rate, there's no fees for taking out any kind of cash advance and things like that. So, like a credit card, like you said, it's going to have a higher interest rate. And a lot of times it may have a fee that goes along with it, where credit line to the bank, you're just going to be transferring your own money that you're already pre-approved for into your account. It's not gonna have any kind of fees on it, it's gonna have the same interest rate, whether you write a check, or you're doing online transfer or transfer by any other mode.

Okay. So, you mentioned, and I said I wanted to kind of go back on this, you mentioned about accumulating all that debt, right? And why the interest rates are a little bit different based on the different account types. So, can we talk a minute about consolidation loans, right? You, you hear about that all the time, like you can lower your debt, and you can try to get out of debt with a consolidation loan. And it seems counterintuitive, I think, sometimes to people that, why would I take on more debt to get out of debt?

You take on more debt to get out of debt, because you can consolidate into a much lower interest rate. I typically like to tell people, if you're going to consolidate that, do it into a term loan, where you're going to have a fixed interest rate to pay it off. Because if you just put it into a credit line to extend it, and maybe pay interest only, you're not doing yourself any kind of favor because all you're doing is extending the time in the interest savings that you potentially get. So, you don't want to trade debt for debt where it's not being paid down over a period of time. People can go through and consolidate debt, if they do it responsibly. They're going to have a term loan, pay it off and hopefully they use a credit line, you know to more responsibly for short-term borrowing needs versus long term.

Okay, so would you recommend or does the bank normally recommend that you close those other lines of credit? When you do a consolidation loan? Or do you leave those out there, because if those credit lines are still out there, you could theoretically continue to use them. And then you wind up right back where you were?

It really depends on the customer and their situation and things like that. If people were just consolidating debt, and they're not overwhelmed with debt, we may not require them to pay off and close those credit cards. But there's times where we do say, hey, you're coming in to pay all these debts off, you might be a marginal borrower, we might, you know, mandate that those credit cards are paid off and closed. If you're not, we may leave them open. And most times, people will let you know, you know, what kind of credit cards they want to do. I'm not opposed to having credit cards out there. But I think, you know, generally speaking, if you have two or three, that's plenty of capacity on a credit card, especially if you're traveling or making hotel reservations, you need a credit card for necessities, most people do. Most people don't need 10, 12, 15 credit cards. And we see that every day in our business where very average normal income people working class people coming in with 10, 12, 15, 18 credit cards. And if you have that many credit cards, typically they're carrying balances of a few $1000. Or we've seen people with 40, 50, $60,000 in credit card debt. Wow. So, that's not an uncommon occurrence that we see on a day-to-day basis. So, that's why we try to tend to shift people into more secure, debt long term debt, and I'm sure we're going to talk about home equity loans at a point here, too.

So, home equity, I think that goes to one of the first things we were sort of, sort of touched on I think we kind of got away from was, the idea of a secured loan versus an unsecured loan.

Right an unsecured loan is just your signature, and we're hoping that you're gonna pay us back on time pay us off through the end of it. And if you have another financial need, you're coming back, a secured loan, you know, could be against her own money, it could be a CD secured loan could be an auto loan or holding some type of piece of collateral. And the biggest kind of collateralized loan or secure loan is a home equity loan where we're filing a mortgage or a lien against your house as collateral. However, when you do that, you're going to get a much lower interest rate on any kind of borrowings, whether it's a credit line, or a term loan, you're going to get a much lower fixed interest rate, if you do it that way. And that's where we do a lot of consolidations, where we're using equity in your home, paying off on a term loan paying off all those unsecured debts, typically, to give you the savings and give you the access to that equity in the future.

So, with something like a home equity loan, would you be looking at the average mortgage rate that's out there right now and then basing the home equity on that? Or is it a different thing entirely?

Generally speaking, in a normalized rate environment, home equity rates are going to be slightly higher than what you would find on mortgage rates. However, currently, the market environment you know has been rapidly escalating for first mortgages. Home equity rates have actually been slightly lower than mortgage rates, because what happens is, you're taking a second lien, typically on a home equity loan, so the risk is higher when you're taking a second mortgage against the house versus the first mortgage. And it all depends on the terms. The shorter the term on a home equity loan, typically, the lower the interest rate. You go 3 years, versus 10 or 15 years, the interest rates going to be higher, because the risk of that for the bank is a lot lower, because you're going to pay off, you know, in 3 years versus 10 or 15 years is where the risk is.

So, when it comes to home equity, you have to have equity in your home too, right? So, you can't necessarily get a home equity loan if your mortgage is a year old? Or could you?

Generally, no, you're not going to be able to get a home equity, because I've had a lot of people over the years, say what do you call a no equity home equity, I call it an unsecured loan. If you have no equity in your house, you cannot get a home equity loan. Most banks, including AmeriServ, might lend up to 85 to 90% of the value of their house, and then minus your first mortgage, and that's your lendable equity. So, just in round numbers, if your house was worth $100,000, and say we're gonna lend 90%, that's $90,000 minus whatever your first mortgage is. So, if your first mortgage is $50,000, we can lend you $40,000. So, that's just kind of the simple math behind it, where you know, 90% of whatever the value is, minus your mortgage is your lendable equity. Well, we potentially could lend you on a home equity loan. Now you have to qualify and a lot of other standards, whether you have good credit, your stability as in your job, your housing history, how much debt you have, what the ratio of debt is, how it's made up and things like that. So, there are a lot of factors that go into.

Okay. So, I think that's one of those terms that gets thrown around that maybe people don't always, don't always pick up on is equity, right? Because it's, it sounds very, I don't know, mysterious, I think to some people that don't have a banking background and stuff and they say oh, well do you have equity in that? But equity is essentially what you have available on the, on the piece of collateral you're putting up.

I mean, true equity is just the value of anything, whether it's a house, a car, or anything physical. And if you have, owe anything against, so it's the difference between the two. The lendable equity is, we're taking a little bit smaller factor, in a home equity, in our case, it's 90% of that value, minus if you owe anything on it. And that's your lendable equity. So, there is a little bit of a difference, but generally speaking, equity is just the difference between the value and anything that's owed.

Okay. And one of the other terms that you had mentioned earlier that I wanted to touch on, too was marginal. You said if the lender, not the lender, the applicant, the loan, the borrower is marginal what's, what's marginal in terms of banking?

But those are the kind of things, marginal bar might be someone that has marginal or average credit, and they have too much of it. You know, another term we use is debt ratio. I don't know if you want to talk about it. Yeah, absolutely. I mean, a debt ratio is just simply, its gross monthly income. So, whatever your income is, before all taxes and deductions are taken out, that's your income for the month, we take all your monthly bills, you know, your housing payment, the new payment we're gonna have on our loan, and any other credit card debt, student loans, any other kind of auto loans, all those monthly payments are added up. And then we divided by your gross income to come up with a debt ratio. And most lenders out there on the consumer lending side of the house, you're looking for somewhere in that 40% range, give or take, as being the high side, if it's over that, that's probably means that you don't have enough money to live on. Here again, there's a lot of other factors that come into play.

So, your gross income is obviously your payment before all your deductions, right? And your net is after your taxes come out and after your maybe your, your health care is paid for by your employer that comes out. Maybe you have a retirement saving that comes out. So, why do banks use gross income rather than net?

The real answer comes down to it's a consistency thing, it's a way for everybody to be judged on a consistent basis. Because your net income can be greatly changed by a lot of discretionary items, like what healthcare you choose, and how much are you taking out for a 401k or any kind of retirement savings, those kinds of things can change. So, if you have a lot of money going out or a 401k, technically, you could reduce that to bring home more net income. So, there's a lot of things that you can do on a discretionary basis, that would be, really minimize what could be taken out there. So, it's a way as a level playing field for all lenders to look at all borrowers on a similar basis, versus looking at it from a discretionary side.

Okay, that makes sense. So, really, it's, it's a, it's playing fair, you know, with everybody. Playing fair

with everybody, from a gross standpoint, gross income, because the net income is your take home pay. Yeah. And that might come into a decision where we look at how much take home pay when I talked about marginal, do you have excess disposable income? If your margin on your debt ratio, like we talked about a couple minutes ago, how much discretionary income do you have to pay utilities? To put food on the table? Pay insurances, homeowners, auto insurance? So, those are where your net income might come into play into the decision for consumer loan.

Is there anything that is exempt from that, that you don't consider discretionary income? Like something like say, a cell phone, for example, you know, most people used to have a landline, right? And that was just the, you had the landline for the house, and that was considered pretty necessary. But as cell phones sort of bridges that gap, right, you have the necessary part of the phone, you have the unnecessary part of maybe having a smartphone with an unlimited data plan and things like that. So, what, what kinds of things are considered in that calculation, what and, what kinds of income or spending is not?

We're just taking any kind of debt, any kind of loan you have. So, any kind of utility, cell phone, things like that, that's not included in a debt ratio. So, that's why we use the gross income as our calculation method, and we realize that people are going to have lots of other debts, or bills that don't show up on a credit report that you got to pay for on a monthly basis. Okay.

I've heard of a lot of people, and I'm sure you have too, who come in and say, well, I've never had a loan, so I should have no trouble getting a loan, right? I don't have any debt. So, I should have no trouble. Is that always true? Or is it kind of one of those things where having no debt could end up actually hurting your chances of getting a loan?

You need to have some stability, and generally most lenders are going to want to have somebody co-sign with you or maybe ask for a secure kind of loan depending on the situation. If you're maybe just starting out and have no history whatsoever, your real short time on the job, you're probably going to need someone to co-sign or be a co-applicant on the loan to get you started. Once you illustrate that you can pay a loan over a period of time, I personally like to see seasonality on a loan. Can you pay a loan three or four seasons, because sometimes people make the mistake of coming in, say, have no loan, loan, experience, they borrow and pay me back in two months. Well, you didn't really prove to me that you could pay me over a period of time. So, the next time you come back, we're probably gonna say, hey, we still need to have that same kind of stability or someone else back and you want that. Generally, what I see, the other side of it is, people try to get, you know, some credit cards, some loans, they go out and get 6, 7, 8 of them all at one time. So, that's not good either. So, it's a good balance to you know, take it kind of slow, you know, maybe get a credit card, get a term loan, pay that term loan over a period of time, get some experience and then you'll be able to do things on your own, you know, from there on out as long as we're responsible.

I think it's important to make the differentiation or the, or to explain the difference between a co-signer and what their responsibilities or their, their liabilities are, versus co-applicant. Yes, thank you.

Yeah. A co-applicant versus a co-signer, a co-signer is obligated for the debt in general, whereas a co-applicant, you're obligated for the monthly payments. So, lenders typically like to see a co-applicant because if you're going on with somebody, you're obligated for that monthly payment, you're gonna be much more aware earlier, there was an issue with repayment, where a co-signer might be a little bit late to the game, where they find out that personally, we're trying to help out to get established, not living up to their obligations. So, generally, most lenders like to see co-applicant versus co-signer. I've always said in my history I've been known as 32 years is, a co-signer or co-applicant, if you're helping someone else, that's a strength to them, to the loan, that's why you're making a loan because of their strength. Somebody's not paying me I'm going to them first, because that's why we made a loan.

Yeah, I think maybe some people don't always quite realize what they're signing on, what they're signing on the dotted line for when it comes to that. And I think that's important. If you're, if you're being asked to co-sign or co-apply for a loan, to understand that you're, you're just as responsible for paying that loan back as the other person is.

Yeah, I mean, even 25 years ago, and I'd be face-to-face with customers, they had co-signers or co-applicants, I would be much stronger with the co-applicant saying, this is your responsibility to pay. Because a lot of times, way back in my history, I would collect loans also. So, you call a co-signer or co-applicant and they're like, well, I only signed my name so they could get the loan, I didn't really want to pay it back. We're like, well, that's why you signed your name. So, we're coming after you for the payment, and if you don't perform your obligations were coming after you from a legal perspective.

So, really, if we break it down, if your friend asked you to borrow money, right, you're most likely going to ask your friend well, how are you going to pay me back? And you might ask your friend, well, have you ever borrowed money somewhere else? And did you pay them back? So, it's in simpler terms, it's really just the idea that having no credit history means that we have no knowledge either for or against the idea that you could pay me back we just, we just don't know. And so that's why usually ask for somebody just co-sign that does have a credit history that you can say, okay, well, you can't pay me back this other person could.

I mean, lenders are always looking at the, there's, I mean, there's lots of different scenarios and acronyms out there. But the four C's of credit, whether credit history, collateral, capital and character, so if you're borrowing from your friend, they know their character, you know, what's the likelihood of Drew pay me back over a period of time, if he comes to me and asked me for money? And we're looking at the same kind of thing, but we're looking at your work history, your credit history, your income, all those factors are taken into consideration, and what's the likelihood of you paying us back? So, the same thing as a family friend or something like that would be the same. With a bank, you're gonna get credit on a credit report where the friend you're not going to get any kind of credit for

that? Sure. Sure. So, let's, so let's talk about a credit report, because we hear all the time about whether it's your credit card company or an ex-, maybe it's Credit Karma, or all these different places that you say, well, you can look at your credit score anytime you can get it once a month, once a week, once a day. But what goes into a credit report?

Credit report is going to memorialize your history, your address history, any kind of work history, if, as long as lenders are putting it in whenever they're doing it, in any kind of loans or credit card history out there. Anytime you inquire for a loan, so if you go try to buy a car and they send it to six different banks, you're going to have six inquiries on there. So, we're going to see, are you shopping for debt? Are you doing things like that? Not all credit reports, or, you know, credit scores are equal. You hear you know Credit Karma, and some of those or different times customers come in and say my credit score is 950. Well, the banking industry typically uses the FICO score, Fair, Isaac and Company, FICO score, that's the most widely used by the banking industry. So, that number goes from 450 to 850. So, your highest credit score is 850. So, when someone tells me they have 928, I know they're using a credit score from a credit card or something like that. So, it might be a good indicator that they might have good credit. But not all credit scores are made the same. And there, they don't have the same kind of scales, so credit scores really just an indicator on, what's the likelihood of you paying us back on time. So, it's not a be all and end all just because you have a high credit score, we're still going to look at your stability, your ability to repay. I mean, that's the big thing, do you have the ability to pay us back based on our debt ratio, like we talked a little bit ago?

And are there different things you said about an inquiry? There are things such as soft inquiries and hard inquiries, what's the difference between those two kinds of things?

A hard inquiry is when you're going out to look for a loan or apply for a loan, there's going to be hard inquiries thrown at Drew, you applied for a loan, at XYZ bank last week, and then you come to us today to do an application. So, we're going to see that you applied somewhere else, and we're going to question, what did you do there? Did you get another loan? Did you get turned down? What happened there? Okay, soft inquiries, typically, for an existing account. You might be doing a credit line review, any kind of, we talked about credit lines earlier, we put them out in certain kinds of loans, like home equity loans, we review on a periodic basis, just to make sure that your credit hasn't deteriorated. So, there's only certain things we're looking at. But lenders always have a right to do a soft pull to see the performance of the loan, how it's being done on a credit line kind of product.

So, it kind of goes back to what we were talking about before your, your you can't do it all the time. But you're, you're kind of, you're kind of testing the waters to see if somebody's getting in over their head before it's too late.

We, we definitely try to do it if it's only on a periodic basis. So, generally, when you're doing those kinds of reviews, if you see it, it's probably still too late, because, you know, it's already out there and people are struggling. Yeah, yeah, it's like I said, when you go back to the credit scores, you know, different variables we look at, I've always looked at credit scores just being an indicator, not a be all and end all. So, you can have a 720 credit score, that's on the average above average side, but that doesn't mean you're gonna get a loan, you might be overloaded with debt. You might have a 650, which is on the lower side. It might be just because of one small item might have hit it, you might have a small collection account, a medical collection account or cell phone, or those kinds of things impact you and no stay on your credit report for at least seven years.

So, you're getting into a little bit of the weeds with credit reports and credit scores, there are things that impact that score more than others. What are some of the ways that you could most effectively impact your score in the least amount of time, like what are the things that are most important when it comes to your credit score?

The most important thing is always pay all your debts on time. The other thing is don't take on too much debt. Don't be out there getting credit cards every month, and racking up things like that. The type of debt you have, and the availability of debts also comes into play. Do you have a lot of term loans versus credit cards and credit lines? Credit cards and the availability of what you have, you know can fluctuate on a day-to-day basis because you make big purchases, you might pay them off. Ultimately, your credit score comes down to a handful of factors, and everybody's credit score is different. And it can change on a day-to-day basis based on whether you bought more items, you paid things down. So, like the FICO score is really based on the four most prevalent factors on your credit report. On your specific credit report. Yours is going to be different than mine and yours could change on a day-to-day basis. So, I always tell people pay your debts on time. Don't take too much out. You don't have to worry about what your credit score is. So, a lot of times people get fixated on they want to 800 credit score. Yeah, and I'm one of those people and sometimes I'm like, alright, if it's not 800 or over if you're 798 you have no issues no problems. At the end of the day 798 is a very high credit score.

And there are three different primary credit card or credit score, I don't want to say providers, but I guess they are providers, Experian TransUnion, and Equifax, right? And the credit scores could vary slightly between those three.

Generally, they're going to vary between the three, most debts are going to show up on all three. But you might have regional lenders or credit unions who only report on one of the three. So, that's where the differences can come up. Or if you have a collection or something that's more on a regional basis, certain credit reports are more prevalent in certain areas.

So, the idea that you should get your credit score from one of those three providers every, every year, like you can get your annual credit report, things like that, is that still something that people should consider doing?

I think it's just, it's a good idea to keep an eye on where you're at. If you stagger them, at least you can see if there's inconsistencies or any kind of potential fraud or something like that. If you stagger them, you're also going to be more aware of what your debt situation is. You're going to see that over the summer, I've racked up a lot of debt here. So those kinds of things, if you're gonna do it, probably more on a staggered basis, that way you can see if there's anything unusual that sticks out to you, or maybe it's more self-awareness for your financial pictures and build a budget on it. Yeah, build a budget and financial awareness.

Yeah, and, and I don't want to get too far into it. But you actually mentioned fraud. And I think it's important to mention that too that, you know, if you're noticing something on one of your credit reports that you didn't do, that's also a good thing to sort of keep an eye on to make sure that you can report that if it's something that is out of the ordinary.

Yeah, if you see anything out of the ordinary, reach right out to, you know, whoever it is, a credit card or lender right away. If it's not yours, make sure you're reaching out to put a stop to it. And then put an alert on your credit report, you can reach out, and the credit reports are obligated to share with the other two credit reports. So, if you do one, it does flow over to the other two.

You can put a notification on your credit too, right? You can tell them that if they get anything, you can basically freeze your credit.

You can freeze your credit, you can put a statement on if anybody inquires for credit, call me at X number and it can put a time period on. A lot of times we'll see it where people will put it on for the next 12 or 18 months, if you see any kind of inquiry, you have to reach out to me to verify that I'm the one that applied for the loan. So, we see, see it on a periodic basis, and we reach out to the customer. And then we're gonna go through and verify that your identity for you know a couple qualifying questions that you would only know the answer to Okay.

Keeping things on track with lending in this episode, I think is important to spend a minute talking about repayment, because you're making your payments on time is obviously a huge part of your credit score, and your credit report. But it is also something that I think people have a little bit of a misconception about when it comes to what the lender expects. The lender is not necessarily looking to collect on your collateral, right? I think it's in the best interest of the lender to have you make your payments on time, is that right?

Banks are definitely not in the collection business. I mean, we collect loans, but we're not in a real estate or car business. We don't want your house; we don't want your car. We want to lend you money, yeah we want you to pay us back. That's definitely something over a long period of time that we want people to succeed. I've always said, I've never made a bad loan, I've had good loans good bad, because if I felt you couldn't pay me back, there was an issue with a loan up front. Of course, we've all had loans go bad, it's just the nature of the business. I've lent billions of dollars over the years. So, it's just a matter of, you're gonna have people that have, come on hard times, they lose their job, they're laid off, there's a sickness. But at the end of the day, we want you to succeed, we want you to pay back, and banks are going to work with you to pay back. They're not just going to come in and repossess your car foreclose on your house. I mean, there's gonna be a long period of time, and you're really trying to work with you to get back on track.

Yeah, I think that's, that's definitely something that people at times, I think have this misconception that the bank is just out to try to take, take whatever they can take. And at the end of the day, it goes back to what we started talking about, which was, I mean, yes, we are in business to make a profit, and we are a business ourselves. But we're basically in business to help our communities, to help the people that need the money to open their first business, to buy their first car, to get their student loan, whatever it might be.

And you're going to take a loss. Anytime you repossess something you're going to take a loss on no matter what the value is or what they owe, you're taking a loss on something like that. So, my job is to take our deposit money, lend it out and you said it correctly is, we want those people to pay us back, come back the next time they have a need. So, we want to be their partner for life. I mean, I know it's one of our slogans or our tag lines, but we want to lend money to people when they need it. And when they come back, we want to be able to lend them money again.

Yeah, yeah, absolutely. The only thing that I don't think we really touched on much and I don't know how you, how much you want to get into this is calculating interest on a loan.

From a lending standpoint you're going to use simple interest, it's simple daily interest. So, all loans are based on the amount your dollar outstanding balance based on your daily interest rate. So, it's really just taking your decimal point out two points, you know say it's a 7% interest rate. So, point 0.07 is 7%. If you divide it by 365, you get a daily interest factor multiplied by the balance, and that's how much interest on a daily basis. So, whether it's a credit card, or credit line or a term loan, your interest is always going to be calculated on the balance outstanding. However, many days in a period between your last payment in this payment. It's a little different for credit lines, because credit lines are based on a prior period, you just think about the credit card analogy I used earlier, you're always paying on a prior period. So that prior period, credit line works just the same way a credit card does is they're gonna find out what was your balance on every day, and what, what interest rate was established for those days. If there was a change in interest rate, it might be different, and every day is going to have what your daily interest is you add it up, that's what your interests are gonna be charged. Okay. On a term loan, it's going to be the number of days between the payments, so your interest paid from your last payment till the next one. So, if it's every 30 days, automatically, you're gonna see your interest go down just a tick, a little bit here and there. I think you might pay 25 days next month, and then you might go 35 to the next one. Here, you'll see a little difference in it but, the days of pre-computed interest that changed a long time ago, where you're paying top heavy interest, everything today is based on simple interest and a daily interest factor.

So, if I have that, right, you know, because sometimes we'll say, well, I want to pay off my loan early, I need to get my loan paid off. So, what you're doing when you ask for that loan payoff is the bank is calculating what you have remaining on the loan. And then the difference between your last payment and whatever date you're trying to make the payoff to calculate the daily interest that would have been added? Because you haven't reached your next payment date yet? Correct. Okay.

So yeah, I mean, a long time ago, you know where there was interest where it's pre-computed interest, and you're paying higher interest, cost on a monthly basis, upfront, the earlier in a loan versus the back end of the loan. So, when it changed to simple daily interest, you're not being penalized. So, you pay it off, it's only based on the interest that you've accumulated from your last payment or your last statement, to the day of pay off. Okay, you might hear the term per diem, per diem is just the daily interest rate, or the daily interest calculation, how much your interest you need. So, your payoff today, Drew is $5,240, and our per diem of $1.20. If you pay it off tomorrow, you add $1.20. And then each day after that, because your balance has a move. So that's how much your interest is on a daily basis until you pay us off.

Okay. And that's why you can't really use that same formula with a credit card, because you could change your balance on that credit card several times a day, if you really think about it. You could

change your balance on a credit card or interest rates could change, prime rate could change, or whatever the index you use could change midcycle. So, yeah, it's a little bit different on a credit card, where you can't use like you would on a term installment loan.

So, you had mentioned before, and you just did it again, about the Wall Street prime rate. Can you explain a little bit about what that is, and why banks use that as the rate of choice or their, their benchmark rate?

It's a widely used index, you know, it's based on various economic factors, and it's a consistent factor out there. So, you got your interest rate, and then any, everybody would add a margin, which is the difference what you're charging over prime rate. So, it depends if it's a secured or unsecured loan, how big a margin might be. Like a home equity loan, most lenders are at prime rate. So, if you use a credit line, home equity credit line, you might be paying prime rate, which today is eight and a half percent. So, that's dramatically climbed over the last couple years, what you're paying 3.5, 4%, two years ago is now 8.5%. So, that's why I always say, a credit line should be used for short term borrowings versus long term. But if it's an unsecured loan, it's going to be paid, you're gonna pay maybe 3% over 4 or 5% over prime rate.

Okay. Okay, so it's essentially a starting point for every bank in the US, and then they kind of take in other factors, regional factors, your particular factors and then calculated an interest rate off of that.

Yeah, I mean, generally, that's what's happening out there. There are other indexes that banks may use, but prime rate is the most widely used, I would say out there.

Okay. Well, I thank you very much for doing this with us. I mean, it's a lot of really great information and we can easily go much, much deeper into a lot of these topics, and I'm sure that we will at some point. But I think this gives people a good overview of what it, what it is involved in doing a simple, a simple bank loan that you might need. And you can, you can use bank loans for just about anything. When you come to your bank and you, and you ask for a loan that, does, does the purpose of the loan, get calculated into your decision as to whether or not you, you grant it? Or can you use a loan for a vacation as easily as giving your son or daughter a wedding?

It really depends on what you, the factors are using the debt ratio and things like that, because we see people use it for home improvements, vacations, weddings, education, debt consolidation. If you're consolidating debt, we want to know what debts you're going to pay off. If you're paying those debts off, we're not going to include that in your debt ratio. That might mean the difference between you qualify and not qualifying. So, very things we see people use. But if you're highly qualified, you're coming in for a smaller dollar amount. It probably doesn't matter what the purpose is. If you're marginal, and you're on the on the cut line, where we say, hey, we're comfortable, not, and a lot of times we have, you know, applications come in, it doesn't say what the purpose is. And say you're denied because you got too much debt. And then all of a sudden, while they wanted to pay off the six credit cards and all this stuff, I'm like, well, if we knew that we would have calculated differently, then obviously, we go back and recalculate and say, okay, Drew, now you qualify because you want to pay off all these debts. So, a lot of different things in there. So, we always want to know the purpose, it's not because we're being nosy, it's because we're trying to make sure we don't calculate things that we shouldn't calculate into the ratios.

Okay. Yeah, that makes sense. Okay, so thank you very much. I hope you, hope you enjoyed visiting with us today.

I mean, I definitely enjoyed it. Yeah.

Absolutely. Thank you very much.

AmeriServ Presents: Bank Chats. This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts to help take some of the mystery out of financial topics. We live our lives using bank products and credit products, mortgages, auto loans, credit cards, but many of us don't always understand what we're getting ourselves into. Please keep in mind that the information in this podcast and in the resources available for download from our website or other sources relating to Bank Chats, is not intended and should not be understood or interpreted as financial advice. We expressly recommend that you seek advice from a trusted financial professional before making financial decisions. Drew Thomas is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. We are not a substitute for our financial professional who is aware of the facts and circumstances of your individual situation.

Thank you for listening. Before you go, we want to once again thank Rusty Flynn of AmeriServ Financials lending division for joining us on the podcast today. If you have questions about the discussion or would like additional information, you can visit us at ameriserv.com/bankchats, or leave us a comment. We look forward to hearing your thoughts about the show. AmeriServ Presents: Bank Chats is produced by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. Production assistants by Jeffrey Matevish. Please check out our full library of episodes which can be found on the ameriserv.com website. You can also download or stream the podcast from your favorite podcast app. For now, I'm Drew Thomas, so long.