Temporary accommodation is also much to be preferred to permanent loans.
In lending upon securities such as land, houses, shares, etc., it is customary to preserve a margin between the value of the security and the amount of the loan or over draft. A house, for example, may have been recently built at a cost of £500, but a banker would not, as a rule, advance £500 upon it. In a few years the house, in all probability, may not be saleable at all at that figure, particularly at a forced sale. Shares, even though of first-class description, may easily, for various reasons, also fall in value. A prudent banker, therefore, in considering what value of securities he should have for an overdraft or loan, ever bears in mind the uncertainty of values and endeavours to . protect himself by lending an amount less ' than the value of the security at the time the arrangement is made. The difference . between the amount lent and the estimated ' value of the security is the " margin." The extent of the margin will differ according to the nature of the securities and the special circumstances of each case, but if a loan has been granted against shares with, say, a margin of 20 per cent., the banker will watch his securities, and, when they begin to fall and the margin to disappear, will require further securities to be given to restore the margin as agreed upon. The margin may be calculated either upon the value of the securities or upon the amount of the loan. The usual practice is to calcu late it upon the value of the securities. The difference of the two methods is shown as follows : Value of securities £10,000 _ Less 20 per cent. = 2,000 £8,000 = Amount to - - - be advanced.
Amount to be advanced £8,000 Add 20 per cent. 1,600 £9,600 = Value of securities required.
In each case the amount to be advanced is the same, £8,000, but in the former case the value of the securities will be £10,000, whereas in the latter case the value will be , 69,600.
In cases where margins of a certain per cent. are required, the simple calculations are : If the margin is 25 per cent. deduct one fourth from the value of the securities offered, e.g.— £2,000 Less one-fourth 500 £1,500 =Amount to be advanced.
If a loan of £1,500 is applied for, the value of the security required to provide a 25 per cent. margin will be one-third of the £1,500 added to that amount, e.g.— £1,500 Add one-third . 500 £2,000 = Security required.
If the margin is 20 per cent., on the same principle as above : Security offered . £1,000 Less one-fifth . 200 £800 =Amount to be advanced.
Loan required . £800 Add one-fourth . 200 £1,000 = Security required.
If the margin is 15 per cent. :— Security offered . £1,000 Less 15 per cent. . 150 £850 =Amount to -- - be advanced. Loan required . £850 Add . . 150 (or roughly one- - sixth) . . £1,000 = Security required.
• If the margin is 10 per cent. :— Security offered . £1,000 Less one-tenth . 100 £900 =Amount to be advanced.
Loan required . £900 Add one-ninth . 100 £1,000 = Security required.
When the amount of the loan required is known, the value of the securities necessary to obtain, say, a margin of 20 per cent. is arrived at by adding to the amount of the loan one-fourth of that loan, the reason being, of course, that when 20 per cent.. or one-fifth, is deducted from the value of the securities, the difference (in this case supposed to be the loan) is in eightieths, and if twenty of those eightieths—that is, one-fourth—are added. the amount is restored to the orig inal figure (in this case the value of the securities), e.g.
£100 =Security.
Deduct 20 per cent, = 20 =Marr,in. or one-fifth b /SO =Loan.
Add the or one-1 = 20 =Margin fourth 1100 =Security.