Analyzing the Feasibility of a Loan. Fred Reinero has had a student loan, two au
ID: 2743537 • Letter: A
Question
Analyzing the Feasibility of a Loan. Fred Reinero has had a student loan, two auto loans, and three credit cards. He has always made timely payments on all obligations. He has a savings account of $2,400 and an annual income of $25,000. His current pay- ments for rent, insurance, and utilities are about $1,100 per month. Fred has accumulated $12,800 in an individual retirement account. Fred’s loan application asks for $10,000 to start up a small restaurant with some friends. Fred will not be an active manager; his partner will run the restaurant. Will he get the loan? Explain your answer.
Explanation / Answer
Ans;
Even though Fred has always made timely payments on all obligations, he is not likely to get a $10,000 loan to start up a small restaurant with some friends. The lender knows that Fred will not be an active manager, and his partner may not have any experience in running a restaurant. Moreover, restaurants have one of the highest failure rates in the business world.
His current yearly income of $25,000 minus expenses for rent, insurance and utilities will leave just enough money to live. His savings of $2,400 are not sufficient to pay off a loan, and he can not access a $12,800 IRA account until he is 59 ½ years old.