Monthly Archives: January 2012

One more about business

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[Today’s run: Limerock Road  4 miles]

I had one more thought about business.

Not too long after our marriage  my wife and I bought a new car. We had a functional car, but needed a bit more space and wanted something newer.  So we shopped very briefly and purchased a new Jeep Cherokee.  We liked it.

When we bought it, I made the assumption that the bank would not approve us for a loan that was actually beyond our ability to pay.  I was counting on them (somewhat) to say, “wait! These dummies really aren’t good for it”, as kind of a back-stop to my own calculations.

Fast forward to the housing market of the 2000’s.  Someone making $50k a year could get an “interest only” mortgage on a $250k house.  (Or whatever the numbers were.  You’ve seen the stupid numbers haven’t you?)

So we can now see that my faith in lenders was misplaced.  Somehow, lenders are glad to lend money that they know people will not be able to repay.  I don’t understand the psychology of this, but I see that it is true.

After we bought that car, we had it for about a year then we sold it.  The payments were killing us.

The second piece of this is the collateral.  The lender seems to think that if you don’t pay for your car/house/boat, that he can come and get it and thereby recoup the money.  But that only works if the collateral has steady or appreciating value.  But it seems obvious that distressed property which has been foreclosed or repossessed does not bring in a full price, and every day that goes by will reduce that price for collateral items that depreciate.

So, lenders are willing to loan you money beyond what you can afford to repay.  And! lenders are willing to base the loan on collateral that has decreasing value and can go upside-down (where more is owed than the item is worth).

Yesterday I admitted that I don’t understand retail.  Today I admit that I don’t understand banking.


Filed under other thoughts
Jan 31, 2012
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