Question

Briefly describe the risk profile of the following loan products: a. Credit card loan b. Mortgage c. Unsecured short term loan for small business

Answer 1

(a): Credit card loan- Credit card is a plastic card that comes under plastic money, issued by a bank. Loan against credit card, is called credit card loan.

Risk: Are as following:

1. If you do not pay on time, you will be charged higher interest and penalty too.
2. Your credit score will come down and it may be difficult to borrow through credit card in future.
3. You may spend more via credit card as you are getting limit. You may become extravagant.

(b): Mortgage- This loan is taken to build a real estate property.

Risk: Your liability will increase and you have to pay higher interest for a certain period of time. If you do not pay EMIs timely, there may be penalties and other charges.

(c): Unsecured short term loan for small business- This loan is taken for shorter period of time. It is not secured by the property or collateral.

Risk: Interest rates are higher on unsecured loans rather than secured loans, Borrower may default in repaying the loan then banks cannot sell any property to recover the loan.