What Is a Loan Portfolio?

Save

Loan portfolios are pools of loans that banks, investment firms or even government agencies own and manage. Loan portfolios are assets because of the recurring revenue that the loan payments create. However, a loan portfolio can also put a business in financial peril if large numbers of borrowers default on loan payments.

Types

  • A loan portfolio normally holds a certain type of loan such as commercial loans, mortgages or home equity lines of credit. Portfolio managers obtain loans for the portfolio by writing loans or by purchasing loans. Banks write both mortgages and home equity lines of credit. Mortgages are sold to investment firms that create portfolios of mortgages bought from many different banks. However, banks keep home equity loans portfolios in-house and use income generated from these loans to fund new home equity loans.

Interest Rates

  • When loans within the portfolio are paid off or refinanced, the fund manager uses the cash proceeds from the payoff to buy new loans. The interest rates on newly written loans may exceed the rates paid on recently paid-off loans, in which case the revenue produced by the portfolio increases, but the reverse can also happen and cause the revenue to decrease. Some loan portfolios finance the purchase of loans by selling bonds that are tied to the portfolio, and bond holders receive bond interest payments that are tied to the interest payments on the underlying bonds.

Credit

  • When you apply for a loan, the lender determines your creditworthiness by reviewing your credit report and your income documentation. You cannot obtain a loan with bad credit or inadequate income. Loan portfolio managers also have credit management guidelines in place and only buy loans written to borrowers who meet those guidelines. On commercial loans, borrowers usually have to requalify for the loan every year, and if reduced revenues mean that a company no longer meets the portfolio credit standards, then the lender or portfolio controller can call in the loan, which means the borrower has to repay the debt. However, lenders and loan portfolio operators cannot call in personal loans.

Considerations

  • A loan portfolio has an overall value that depends on the size of the portfolio and the amount of revenue that it creates. The portfolio loses value every time a borrower defaults on one of the underlying loans. If enough borrowers default on loans, then the portfolio owner has to adjust its accounts to show that the portfolio, as an asset, has lost value. A lender can become insolvent if its liabilities and debts exceed its assets. This can occur during a severe recession, as loan portfolios shrink due to foreclosures and cause lenders and investment firms to go bankrupt.

References

Promoted By Zergnet

Comments

Resources

You May Also Like

  • Definition of Portfolio Management

    Portfolio management is the act of managing and monitoring assets and investments. The goal of these investment decisions is to make the...

  • How to Buy Payday Loan Debts

    Payday loan debts are the outstanding amounts on payday loans that the payday loan companies have written off. Once payday loan debts...

  • About Home Equity Loans & Taxes

    Home equity loans and mortgage payments are all considered tax deductible, which is why many home owners find equity loans so desirable....

Related Searches

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!