20 October 2050

Sub-prime loans

You understand what sub-prime lending is, right? Just in case you don't, here's a quick overview. In Australia, if I go to a bank and ask to borrow some money, they'll want to know about my assets (what I earn, what I own) and my liabilities (what I owe). They'll then decide, based on that info, whether I can repay the loan. If I can, they'll lend me the dosh, otherwise - stiff shit. In the US, that's what they call a prime loan - lending money to a person who's likely to be able to meet the repayments. A sub-prime loan is lending money to people who may not be able to repay the loan.

So now you're asking yourself why would a bank/financial institution lend money to someone who can't repay the loan.

Let's say that Fred earns very little money, owes stacks on his credit card, and wants to buy a house currently valued at $200,000. The financiers offer him the entire $200,000 - no deposit, at 10% (a higher interest rate than a prime borrower because he's a crap risk). Why on earth would they do that? They do that because they're pretty certain that Fred will make the first few payments (at a higher interest rate than their prime borrowers), then default (not be able to make any more payments), at which stage they repossess the house, sell it for $200,000 (and I bet they lend the next suckers the money), and they're winners. Of course, that only works if the house sells for its original loan value of $200,000 - if it sells for, say, $180,000 (or if it doesn't sell at all) then the lender loses money (and don't forget Fred - he's homeless and has nothing to show for his few repayments). And that's how the Americans have fucked the global economy.

America sneezes, the world catches cold.

Got it?

So WHY THE FUCK are there ads on Australian TV offering to lend money to people who have poor credit ratings or who have been refused loans by banks.

Blaaah. Sometimes the stupidity blows my mind.