Let’s Avoid 2008 From Ever Happening Again!
In the decade of the 2000′s most of the world experienced a tremendous wave of credit being issued. By funds be made available to most individuals and companies, it provided opportunities for dreams to be established, homes and cars to be purchased, growth to occur, jobs to be created, and much, much more. What was neglected was responsibility. Does CreditImpress support the actions of banks/firms that allowed this credit to be issued? No. However, we also do not side with the ‘receivers’ of said credit. It’s an argument that will be debated until the end of time. Banks/Financiers typically breeze through terms and agreements for you to sign to establish a sale. At the end of the day, you can make the case of buying a home or car is no different than buying a toaster. You’re committing to pay a certain price, you are making the decision that you can afford this purchase, and the bank (or in this example ‘store’) is only concerned in making money from the sale. When you walk out their door, the next customer becomes important and you become another number in a report handed to a manager somewhere. The catch is – a toaster costs $20 dollars. A home costs hundreds of thousands and takes you years to pay off. Even if you used a credit card, your minimum payment is probably more than the cost of the toaster. So it’ll be paid off in a month. The majority of those who purchased a home were given the monthly payment. It was in big, bold letters. Were the terms of an ARM loan completely laid out? Most of the time, no. Did the banks make a strong effort to let borrowers know that by paying interest only on that loan, not a dime of your payment would go to paying down your balance? Most of the time, no. Why did so many foreclosures happen? Because interest rates went up. Here’s an example: An 5 year ARM loan was issued on a home in 2003 and the interest rate was 2%. The minimum payment on that home was $1000. By paying the minimum every month, the home owner kept the mortgage current. What wasn’t explained is when that 5 year period passed; most terms were that the interest rate adjusted to ‘prime rate’ which at the time was around 8%. What did that mean? The minimum payment on the load quadrupled! The $1000 payment (2%) became a $4000 (8%) payment! And the borrower still was not paying down their principal balance! Since principal wasn’t being paid down, and the borrower tried to refinance, the bank said no to a new loan. Why? Because most homeowners owed more than what their house was worth. And it is virtually impossible to have a loan issued for more than something is worth. And here we are.
It has been discussed numerous times that the general public was misleaded, taken advantage of, and in some cases even lied to. However, there were some honest banks, just like naive borrowers, who assumed that home values would never go down, that their borrowers dreams would never be crushed, that due to the halting of credit to businesses their jobs being lost, and so on. Most people have families, their own careers, and did not major in economics in school. Many reasons to not consider the ins and outs out finance. That’s usually the lenders job. The consumer puts their faith that the lender understands their situation enough that they’re making a decision that would not be regretful.
Where the consumer needs to accept responsibility is that with credit being so easy to obtain, some individuals bit off more than they could chew and became glutinous as if the ride would never end. It’s not a wise decision to purchase a $50,000 car with equity from your home. That equity loan might take 20 years to pay off. This means you’re paying the car off probably a decade to 15 years after you got rid of it or traded it in. Lavish furnishing, exotic vacations, the list goes on and on. A very large group of borrowers used the value of their home to live life to the fullest, and everyone deserves the right to enjoy themselves. What was unfortunate is most borrowers were not informed that this would probably result in them losing their home, their equity, and drastically lowering their credit score due to the high utilization of their available credit.