Loan Rates Are Counter-Intuitive.
September 28th, 2008
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by LouisGreen · Filed Under: Commentary · Consumer News · Miscellaneous
The current money crisis has brought up something I’ve thought of as a consumer attorney but never shared with anyone.
It is that LOAN RATES ARE COUNTER-INTUITIVE. People who have the worst credit ratings pay the highest interest rates, and people with the best credit pay the lowest. It should be the reverse.
A lower payment is easier for a credit risk to repay; it accelerates equity accumulation, and therefore protects the loan owner and particularly the loan guarantor in the event of a default. Those with excellent credit are better able to afford a higher payment and would have an incentive to accelerate their payments to increase their equity, choose shorter term loans and pay them off sooner.
In reality, those with excellent credit don’t have to pay higher interest and because they create a competitive lending market for their business. Therefore, for real money to be made in lending, particularly where there is a pressure to earn maximum short term profits, it has to be made by lending to higher risks, charging them high interest, adding on initiation points and lots of other fees and perpetuating 30 year mortgage as the norm. Very few people understand what happens at a closing, and even fewer, even lawyers don’t read the fine print in their closing documents.
Why a sub-prime craze? Because that’s where the money was made for a long time. Why not short term greed if we’re all dead in the long run?
And now those that decry government welfare at the country club are now asking for….
Louis M. Green
