Why do banks allow Negative Equity Financing?

[BlkGS]

Originally Posted by spazzyfry123

Financial illiteracy is the foundation to make it successful! There is seemingly no form of "welcome to the real world" class being offered and to know what it takes to live takes an individual to self-feed.

$500,000 30 year mortgage at 6.5% interest = $640,000 in interest paid on top of the $500,000 principal. Never mind the PMI because you couldn't come up with 20% down.

But the same logic applies to the auto loan. Get an 84 month loan at an insane interest rate on the $80,000 truck you just had to have. While it is a depreciating asset, it is also one that potentially has a horizon date - one that is likely met before the vehicle is owned. With the high interest, you've probably paid more than the original loan amount with more to owe for this truck that is now worth nada. Rinse/repeat - but this time with negative equity!

All focus on the monthly payment to chalk it up as "I can swing that." The institutions thrive on this and certainly wouldn't lobby to make it illegal nor educate.

It starts with college too. Kids get told to go to college or else, and have no idea the amount of debt they're going into to hear some loser who couldn't get a real job tell them about how bad it is in the US. Then they'll get out with massive debt and have a useless degree to show for it and drown in student loan debt, voting for the people who dangle the carrot of using their own tax money to pay for it all for them.

It's 100% by design.

[Mech Spec]

Originally Posted by BlkGS

In short, people don't save anymore. That's why we have credit cards and all the "small loan" stuff where you pay in a couple of payments. People don't have liquid cash. The statistics are crazy, something like 75% of adults couldn't come up with $5000 in 30 days to cover a large expense, or $750 in 24 hours. It should scare you, a lot.

Its because people just spend the second they have any line of sight to money.

Car forums are full of people buying mods they cant afford.

I appreciate the substantial access I have to 0% financing for purchases, I make a few bucks off each purchase, usually better than CC rewards for the 30-45day float.

It's definitely frightening that people run it so tight, I still watch my money closely even though I'm sitting on a >1 year emergency fund.

[BlkGS]

Originally Posted by Mech Spec

Its because people just spend the second they have any line of sight to money.

Car forums are full of people buying mods they cant afford.

I appreciate the substantial access I have to 0% financing for purchases, I make a few bucks off each purchase, usually better than CC rewards for the 30-45day float.

It's definitely frightening that people run it so tight, I still watch my money closely even though I'm sitting on a >1 year emergency fund.

Agreed totally. The downside of car forums is in most cases you can't tell who someone REALLY is. It's easy for people to put a confirmation bias on others and assume they're at the same stage of life as they are, and that they should have the same sorts of disposable income. The guy with the full carbon fiber kitted built motor car.on HREs is likely not in the same stage of life as the person who's just bought their "dream car". But if you don't know someone in person, that's all hidden.

You don't know if someone is in severe debt to do their builds and rotating cars, maybe they're a trust fund baby, maybe they're way older than you think. It's so easy to get caught up in "what everyone else is doing" and not be happy with what you have and are doing.

[Phillies8008]

Originally Posted by BlkGS

Agreed totally. The downside of car forums is in most cases you can't tell who someone REALLY is. It's easy for people to put a confirmation bias on others and assume they're at the same stage of life as they are, and that they should have the same sorts of disposable income. The guy with the full carbon fiber kitted built motor car.on HREs is likely not in the same stage of life as the person who's just bought their "dream car". But if you don't know someone in person, that's all hidden.

You don't know if someone is in severe debt to do their builds and rotating cars, maybe they're a trust fund baby, maybe they're way older than you think. It's so easy to get caught up in "what everyone else is doing" and not be happy with what you have and are doing.

OMG, I couldn't agree more. The only person you should be racing is yourself – everything else is just a losing proposition and leads to unhappiness. I know so many people that have "everything" but are profoundly unhappy. So great, they're "winning," but are they really?

I don't have the biggest house, the Z4 M40i I have ordered will almost certainly be the nicest car I ever own, etc., but I don't really care how that compares to others. What I know is that I'm doing very well compared to the past, have the things I want (within reason), and am financially secure. Whatever the next guy or gal has is their deal, not mine.

People have always been this way, but I think that the social media age has exacerbated it to the nth degree. All of these people post the most contrived, staged pictures of their lives designed to give the best possible representation of their lives. But it's just a facade - no one posts their argument with their spouse, their kids crying in the airplane, the day when everything goes to shit, their struggles to pay the bills, their shitastic day at work, etc. Just the good stuff, posed to look extra good and perfect. But a lot of people buy it, see how "great" this other guy's life is, and feel like they're "losing" in comparison. It's a terrible, non-productive cycle.

[Altamate]

Originally Posted by Phillies8008

Banks oftentimes do require a certain percentage of the purchase price be paid as a downpayment, but this is entirely at their discretion. I doubt you'd ever see this codified.

I’m no expert and really just having fun here in this thread, but the rules are different in Canada. I’m not saying better, I’m saying different.

If you want to refinance/remortgage your home or buy a home/building here. You must have it independently appraised and can only finance to 90-95% of the appraisal if it is a primary residence. If it is not a primary residence then you can only finance to 80% and many banks will only do 75%.

[maticCRO]

Originally Posted by BlkGS

The last guy aggressively initiated inflation with insane amounts of government spending on things that they wanted. Trillions wasted in green initiatives and things like that. That money being poofed into existence drove inflation by devaluing dollars by making so many more of them in existence.

All that said, we need more financial literacy in the population. But if we did that people would be alarmed by the national debt. The government doesn't want that, because both sides have made a very good living off spending our money that doesn't exist yet on things we want for votes.

Exactly this regarding financial literacy. Totally agree
USA let banks totally F up financial system, which had a good idea working UNTIL they let Federal reserve bank PRINT money and you didnt need to deposit counter value in gold, they invented "Bonds" aka I owe yous, so there is your reason for inflation, financial crisis and so on. I am not hating on USA, just stating what anyone who spent more than 2h on Banking system knows.
Today, USA national debt is almost 38 000 000 000 000$, that is 38 000 Billions (not sure what terms you use, in my country we would say 38 billion but you use billion for 9zero figure), that is 110 000$ per US citizen.
Yes, that did make USA the strongest economy in the world, with "best life opportunities" and really good standard (seemingly)... But tell me, what would happen if that money came to be collected, how do you pay

[maticCRO]

Originally Posted by BlkGS

The last guy aggressively initiated inflation with insane amounts of government spending on things that they wanted. Trillions wasted in green initiatives and things like that. That money being poofed into existence drove inflation by devaluing dollars by making so many more of them in existence.

All that said, we need more financial literacy in the population. But if we did that people would be alarmed by the national debt. The government doesn't want that, because both sides have made a very good living off spending our money that doesn't exist yet on things we want for votes.

Exactly this regarding financial literacy. Totally agree
USA let banks totally F up financial system, which had a good idea working UNTIL they let Federal reserve bank PRINT money and you didnt need to deposit counter value in gold, they invented "Bonds" aka I owe yous, so there is your reason for inflation, financial crisis and so on. I am not hating on USA, just stating what anyone who spent more than 2h on Banking system knows.
Today, USA national debt is almost 38 000 000 000 000$, that is 38 000 Billions (not sure what terms you use, in my country we would say 38 billion but you use billion for 9zero figure), that is 110 000$ per US citizen.
Yes, that did make USA the strongest economy in the world, with "best life opportunities" and really good standard (seemingly)... But tell me, what would happen if that money was to be collected, how do you pay ~80 times what Elon Musk is worth today? It would come to collapse, thats what would happen. And there is your answer why there is almost no middle class, super wealthy are becoming even more wealthy, and normal people poorer...

[ASAP]

Originally Posted by Altamate

I’m no expert and really just having fun here in this thread, but the rules are different in Canada. I’m not saying better, I’m saying different.

If you want to refinance/remortgage your home or buy a home/building here. You must have it independently appraised and can only finance to 90-95% of the appraisal if it is a primary residence. If it is not a primary residence then you can only finance to 80% and many banks will only do 75%.

canada is partially smarter until you realize most homes are financed w variable interest rates... lol... we learned that lesson 15 years ago and your homes vs median income are vastly more unaffordable

[ASAP]

Originally Posted by maticCRO

Exactly this regarding financial literacy. Totally agree
USA let banks totally F up financial system, which had a good idea working UNTIL they let Federal reserve bank PRINT money and you didnt need to deposit counter value in gold, they invented "Bonds" aka I owe yous, so there is your reason for inflation, financial crisis and so on. I am not hating on USA, just stating what anyone who spent more than 2h on Banking system knows.
Today, USA national debt is almost 38 000 000 000 000$, that is 38 000 Billions (not sure what terms you use, in my country we would say 38 billion but you use billion for 9zero figure), that is 110 000$ per US citizen.
Yes, that did make USA the strongest economy in the world, with "best life opportunities" and really good standard (seemingly)... But tell me, what would happen if that money was to be collected, how do you pay ~80 times what Elon Musk is worth today? It would come to collapse, thats what would happen. And there is your answer why there is almost no middle class, super wealthy are becoming even more wealthy, and normal people poorer...

it will never be paid as a vast majority of the debt is owed to ourselves not foreign entities... it will be inflated away

[maticCRO]

Originally Posted by ASAP

it will never be paid as a vast majority of the debt is owed to ourselves not foreign entities... it will be inflated away

This is where you are wrong, in the next 20y it will double or even worse. Plus ,intergovernmental debt is almost 1/4 of it, so yes, it isnt majority of USA debt, but it is still over 8 000 Billion USD...But this is all such a vast topic, dont want to hijack this thread

[BlkGS]

Originally Posted by ASAP

it will never be paid as a vast majority of the debt is owed to ourselves not foreign entities... it will be inflated away

It's still debt, and "inflating it away" absolutely CRUSHES the middle class. That's why the last guy was so reviled by regular folks. While the ultra wealthy lodge their money in real.estate and hard assets that are inflation protected, regular folks get to take the unubricated shaft of inflation, destroying their buying power and pushing them further down the socioeconomic scale.

[Hit_Apex]

Large national banks absolutely have loan-to-value maximums and are highly regulated. Sounds like you're referring to smaller less-regulated subprime lenders like Tricolor who just went bankrupt.

[BlkGS]

Originally Posted by Phillies8008

OMG, I couldn't agree more. The only person you should be racing is yourself – everything else is just a losing proposition and leads to unhappiness. I know so many people that have "everything" but are profoundly unhappy. So great, they're "winning," but are they really?

I don't have the biggest house, the Z4 M40i I have ordered will almost certainly be the nicest car I ever own, etc., but I don't really care how that compares to others. What I know is that I'm doing very well compared to the past, have the things I want (within reason), and am financially secure. Whatever the next guy or gal has is their deal, not mine.

People have always been this way, but I think that the social media age has exacerbated it to the nth degree. All of these people post the most contrived, staged pictures of their lives designed to give the best possible representation of their lives. But it's just a facade - no one posts their argument with their spouse, their kids crying in the airplane, the day when everything goes to shit, their struggles to pay the bills, their shitastic day at work, etc. Just the good stuff, posed to look extra good and perfect. But a lot of people buy it, see how "great" this other guy's life is, and feel like they're "losing" in comparison. It's a terrible, non-productive cycle.

Social media has had so many negative effects it's wild. Everyone thinks that everyone is is banging world class hotties, every car is making 1000hp, and everyone has a 6000sqft mansion. None of it is real, but people can't see that.

[afadeev]

Originally Posted by ASAP

Can someone explain why it's legally permissable to allow car loans to be financed with negative equity?

For the same reason that one can obtain unsecured / personal loans - the asset value backing the loan are only one of the variables effecting probability of loan payment!

Originally Posted by ASAP

Why does the government permit banks to do this?

Why not?
It's the responsibility of the borrower to be responsible with his/her money, not the rest of the society!

If you want to improve borrowers (or voters) competency - financial (or general economics) education is the answer. It is not the quick and easy answer that most folks desire, but it is the answer nonetheless.

a

[Efthreeoh]

Its called a Reverse Mortgage.

[Phillies8008]

Originally Posted by afadeev

For the same reason that one can obtain unsecured / personal loans - the asset value backing the loan are only one of the variables effecting probability of loan payment!



Why not?
It's the responsibility of the borrower to be responsible with his/her money, not the rest of the society!

If you want to improver borrowers (or voters) competency - financial (or general economics) education is the answer. It is not the quick and easy answer that most folks desire, but it is the answer nonetheless.

a

Yeah, that'd be great, but in case you haven't noticed the trend is going the other way, has been for some time, and doesn't appear to be changing anytime soon. Turns out that dumbing-down public education for decades has some rather negative knock-on effects. Who knew?

This being the case, it seems to me that it'd be better to acknowledge that reality and do something that's actually vaguely viable to address the situation, rather than just point to something that's not going to happen as the solution. Of course, since the same crowd that's worked to destroy education also wants to keep fleecing the majority of their fellow citizens, I suppose that's fairly unlikely to happen either. After all, that was the entire point of making the plebs dumber. Sigh.

So, we'll just barrel on towards the next financial meltdown and let the people responsible for it walk off into the sunset with their wheelbarrows full of money while the rest of us pay for it. It seems like this country can never, ever learn from history. Voters will reliably allow themselves to be enraged by the next manufactured wedge issue and ignore the things that actually matter and would improve their lives. Again, sigh.

[zx10guy]

At some point, there has to be some basic accountability by the people that get themselves into the situation of negative equity in auto loans or agreeing to outlandish loan terms. Just look at the myriad of videos Yusuf Benallal has put up on Youtube. He tries to help people out with the predicament they're in and provides honest financial advice with the cars they're looking to purchase. He has said many times in his video that at the end of the day it's the responsibility of the buyer to know what they're getting in to. Doing basic math and just reading through the loan documents where everything is spelled out in black and white.

I know many social media channels put up the more sensational videos to get clicks and such. But here's an example of someone that thinks they're doing well and wants to front an image. He gets offended when the sales guy is actually trying to give him sound financial advice. Imagine thinking having the cash to put as a down payment is no problem but having to take out a loan to have the down payment on another loan.

https://www.tiktok.com/@movingmerch/...44461954075946
https://www.tiktok.com/@movingmerch/...96765028093226

[zx10guy]

Since there was a mention of the 30 year mortgage being a scam, it really depends. I have 30 year mortgages on both of my properties but they're at very low interest rates (2.874 and 3.25) both fixed rates. I have chosen to divert the money I would have otherwise put into the homes into the stock market and have made out much better. The equity of my homes only represents a quarter of my total net worth. I can go into the deeper discussions as to how this is better in my opinion than loading up your net worth into real estate that isn't cash flowing (ie rental income).

With that said, I bought my homes well before the recent crazy run ups in home prices. If I were in the market to buy now, there's no way I would do it with the inflated home prices along with the interest rates. I'd rather rent and then pour all that money into other investments.

The TLDR is that I have a 30 year mortgage on my homes that I didn't over pay for and have close to the historically lowest interest rates.

[Efthreeoh]

Originally Posted by Phillies8008

Yeah, that'd be great, but in case you haven't noticed the trend is going the other way, has been for some time, and doesn't appear to be changing anytime soon. Turns out that dumbing-down public education for decades has some rather negative knock-on effects. Who knew?

This being the case, it seems to me that it'd be better to acknowledge that reality and do something that's actually vaguely viable to address the situation, rather than just point to something that's not going to happen as the solution. Of course, since the same crowd that's worked to destroy education also wants to keep fleecing the majority of their fellow citizens, I suppose that's fairly unlikely to happen either. After all, that was the entire point of making the plebs dumber. Sigh.

So, we'll just barrel on towards the next financial meltdown and let the people responsible for it walk off into the sunset with their wheelbarrows full of money while the rest of us pay for it. It seems like this country can never, ever learn from history. Voters will reliably allow themselves to be enraged by the next manufactured wedge issue and ignore the things that actually matter and would improve their lives. Again, sigh.

Hammer squarely hit on nail. Perfect.

[Efthreeoh]

Originally Posted by zx10guy

Since there was a mention of the 30 year mortgage being a scam, it really depends. I have 30 year mortgages on both of my properties but they're at very low interest rates (2.874 and 3.25) both fixed rates. I have chosen to divert the money I would have otherwise put into the homes into the stock market and have made out much better. The equity of my homes only represents a quarter of my total net worth. I can go into the deeper discussions as to how this is better in my opinion than loading up your net worth into real estate that isn't cash flowing (ie rental income).

With that said, I bought my homes well before the recent crazy run ups in home prices. If I were in the market to buy now, there's no way I would do it with the inflated home prices along with the interest rates. I'd rather rent and then pour all that money into other investments.

The TLDR is that I have a 30 year mortgage on my homes that I didn't over pay for and have close to the historically lowest interest rates.

The best financial planners will tell you to keep the longest, most expensive mortgage you can afford until the day you die.

[Efthreeoh]

And there is actually a lending instrument called a "negative equity loan". I used one to buy my first house. You use it to buy real estate and then refinance the property when your income can afford a standard mortgage instrument.

[zx10guy]

Originally Posted by Efthreeoh

The best financial planners will tell you to keep the longest, most expensive mortgage you can afford until the day you die.

For me it's made more sense. My mortgage payments for both properties combined are less than what many pay for just their primary residence.

My financial strategy is on the principle of putting money into the market as soon as possible to leverage the time in the market. With my always be buying mentality, I'm able to dollar cost average and take advantage of times the market dips to buy more shares at a discount. And then there's the whole compounding thing.

Loading up the bulk of my net worth into non liquid assets (real estate) just doesn't make sense to me when they're not cash flowing rental income.