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Old 04-12-2007, 08:01 AM   #1
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I we headed for financial ruin? CRAZY car ad I heard

Ok, I have heard about interest only mortgages, and for the life of me can't figure out WHY anyone would want that. You are sending money to the bank, and not paying down the principal. To me that is CRAZY, but maybe there is a good reason for some people I don't understand.

This is where I KNOW it is CRAZY. A car dealership is offering no payments until 2008, or something like that! WHAT???!!!!! Don't people understand that as soon as you drive a car off the lot, you have lost money? You are going to buy a car, and while the value is depriciating, you are not paying down your loan? What will happen when they go to trade it in, or try to sell it, and can't get what they owe on the loan?

Am I in the twilight zone here? People can't be that desperate for credit, can they?
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Old 04-12-2007, 08:10 AM   #2
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The world has gotten crazy, hasn't it?! My husband will die when I tell him this one! The interest only mortgages bother him to no end.
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Old 04-12-2007, 08:20 AM   #3
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the advantage of interest only is a very low payment. If you are building new or flipping a house and plan to sell in 6 months or even one or two years then you pay very little during your ownership which should mean more profit.
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Old 04-12-2007, 08:24 AM   #4
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the advantage of interest only is a very low payment. If you are building new or flipping a house and plan to sell in 6 months or even one or two years then you pay very little during your ownership which should mean more profit.
Mikeeee

Yes, I figured there are some peopel who can take advantage of an interest only, but some lenders take advantage, and use it to get people into houses that they can't afford. That is why the foreclosure rate is almost an epidemic right now. In my area, it is up 300% from 2 years ago.

But, no payments on a CAR LOAN for a YEAR? How does that benefit ANYONE but the car dealership? OK, possibly the bank, if the car in not repo'd sooner than later.
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Old 04-12-2007, 08:28 AM   #5
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Quote:
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the advantage of interest only is a very low payment. If you are building new or flipping a house and plan to sell in 6 months or even one or two years then you pay very little during your ownership which should mean more profit.
Mikeeee
This is absolutely correct in regard to interest only home loans. We do this for every lot we purchase. Hold on to it for 2 years and then flip it. Why pay out of pocket on the principal for something we don't intend to keep? Furthermore, use a home equity line of credit for the home/lot interest payments and there is no out of pocket except for the interest on the LOC. When the property is sold all is paid off and what's left is pure profit.

As for the auto loans... I can't think of even one acceptable reason to do that. I don't like car payments so deferring them really seems greek to me!
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Old 04-12-2007, 08:28 AM   #6
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I have an interest only ARM mortgage right now (until 2010 when it resets). I works for me.
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Old 04-12-2007, 08:28 AM   #7
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There is a reason the subprime lending market is in shambles: it's terrible money sense.

But people with terrible credit have not exactly demonstrated fiscal responsiblity in the past, and many of these borrowers are not educated about financial matters. They often do not see clearly what they are getting themselves into, thus the term "predatory lending" is the favorite descriptor.

All these borrowers see is that:

1. even with their awful credit here is someone willing to let them get into that house or car.

2. the payments are low, therefore they can afford it, so EVENTUALLY (they think) they will pay it off.

The subprime mortgage industry used unconventional loans, almost exclusively ARMs, that are now resetting at a higher interest rate that these folks cannot afford. I would imagine the car loan system could also work in similar adjustable interest rates, or overcharge on a car enough at the start, so that even with the inevitable slew of defaulters, they are still making money hand over fist. And all they see are dollar signs.
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Old 04-12-2007, 08:30 AM   #8
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Originally Posted by Disney1fan2002 View Post
Ok, I have heard about interest only mortgages, and for the life of me can't figure out WHY anyone would want that. You are sending money to the bank, and not paying down the principal. To me that is CRAZY, but maybe there is a good reason for some people I don't understand.

This is where I KNOW it is CRAZY. A car dealership is offering no payments until 2008, or something like that! WHAT???!!!!! Don't people understand that as soon as you drive a car off the lot, you have lost money? You are going to buy a car, and while the value is depriciating, you are not paying down your loan? What will happen when they go to trade it in, or try to sell it, and can't get what they owe on the loan?

Am I in the twilight zone here? People can't be that desperate for credit, can they?
We actually did this when I bought my truck. My plan was to put the money away every month so I could have a huge down payment when we got our first bill. However my DH lost his job do to 9/11 aftereffects so it turned into a huge life saver for us not having a car payment for a year. DH did find a new job but for about 1/2 of what he was making. We had also just sold our house for a smaller house house so we lived off the proceeds of the sale and not having a car payment. Was it ideal? No, but it saved us from wondering where the money was going to come from. I am now 8 payments away from paying off my truck (but will pay it off in June) and intend to drive it for at least 2 more years.

ETA We were planning on buying that truck to begin with and had no idea about the no payment no interest for a year plan until after we looked at the truck.
And Mikeeee is right, great for a flip house but I would never do it for a long term home.
They also have those loans where elderly people can live in their homes for free but the bank takes the house when the move out or pass away. Now those scare me!!!
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Old 04-12-2007, 08:50 AM   #9
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Another scenario where this might be useful is if you have the money for the car now, but keep it invested for the year before the payments are due. If the market does well you could have earned enough to make several of the payments.

I agree, with cars it seems nuts to string it out like this.
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Old 04-12-2007, 09:00 AM   #10
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Ever watch "King of Cars" on A&E? It's insane what people come in wanting. They want a $40,000 tricked out brand new car with no money down, negative equity in the piece of junk car their in now, and want a payment of $250 a month. They usually walk out with that tricked out car, but with a payment of $500 a month. I've seen payments on that show as high as $700+ a month!!!!

I've seen people on that show with recent bankruptcies, no proof of employment, people who need a co-signer (and some one actually co-signs for them!) all kinds of crazy stuff. If they were just buying a $7k used car it wouldn't be so bad, but they always seem to go for the car that's 2X or 3X more than they can possibly afford.

And it's not that the dealership is sleezy, they just feel that it's the buyer's responsibilty to figure out what they can afford, it's not the salesman's job to ask them "how do you plan on feeding your kids next month if you take on a $500 a month payment?"

Stuff like this is truely scary!
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Old 04-12-2007, 09:02 AM   #11
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Quote:
Originally Posted by JR6ooo4 View Post
the advantage of interest only is a very low payment. If you are building new or flipping a house and plan to sell in 6 months or even one or two years then you pay very little during your ownership which should mean more profit.
Mikeeee
Profit will not be higher but carrying cost will be lower (made up in the amount to pay back being higher).

A lower interest rate and lower closing cost mean more profit.
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Old 04-12-2007, 04:35 PM   #12
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Another scenario where this might be useful is if you have the money for the car now, but keep it invested for the year before the payments are due. If the market does well you could have earned enough to make several of the payments.

I agree, with cars it seems nuts to string it out like this.

Ok.... Be honest, do you really believe the people with the money and the financial discipline are the ones taking advantage of this offer? Maybe .009% are.
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Old 04-12-2007, 04:39 PM   #13
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I've seen people on that show with recent bankruptcies, no proof of employment, people who need a co-signer (and some one actually co-signs for them!) all kinds of crazy stuff. If they were just buying a $7k used car it wouldn't be so bad, but they always seem to go for the car that's 2X or 3X more than they can possibly afford.
That's what I am talking about!
It used to be, if you did not have good credit, you had to go without, or save up. Now it seems ANYBODY can buy anything, and as long as the payment is low enough, they take it. Whether they are not aware how much it is actually costing them, or don't care, this can't be good for banks. Sure, I know some people need a "break" to build up their credit again, and this gives them that opportunity, but most of the customers are digging a bigger hole for themselves, IMO.
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Old 04-12-2007, 04:41 PM   #14
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Ok.... Be honest, do you really believe the people with the money and the financial discipline are the ones taking advantage of this offer? Maybe .009% are.
No, not really!! But that's the only scenario I could think of that made any sense.

I think people who take advantage of this offer now are the same people who will be in bigger financial trouble this time next year....
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Old 04-12-2007, 04:51 PM   #15
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Ok, I have heard about interest only mortgages, and for the life of me can't figure out WHY anyone would want that. You are sending money to the bank, and not paying down the principal. To me that is CRAZY, but maybe there is a good reason for some people I don't understand.
There are very good reasons for using an IO feature in certain situations. If you were buying a home and knew you were moving in 1-2 years, there's no reason to take out a 30-year FRM, for example. With a fixed 30, 99.5% of what you pay in year one is interest anyway, which isn't materially better than an IO, and the second year isn't much better. So you'd take on a higher-rate, fully amortizing payment and accumulate about 1% equity.

IO car loans, 72-month car loans and the like are clearly nuts, however.
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