Subprime Loans and Other Easy Credit

To quote a Globe and Mail article about whether the subprime mess in the U.S. could spread to Canada … “Typically, such loans carry a higher interest rate. But to entice borrowers, lenders usually start with a lower “teaser” rate that rises sharply after two years. Many subprime loans started out at 8 per cent and increased to 11 per cent. Borrowers were often told not to worry because they could always refinance later. After all, they were told, their house would be worth more by then.”

Although Canada’s system does not have subprime loans, the concept is probably universal, at least in Western style economies. Offer the consumer a deal almost too good to be true. After all, your personal finances will be better as time goes on.

Example # 1: Furniture companies telling you to furnish your house today, and do not pay a cent until 2010. The problem is that many of us do not plan the repayment and the next thing you know, 2010 arrives, your cash flow sucks, and the furniture company almost financially rapes you with accumulated interest.

Example # 2: The credit card company offers you a special 1.9 percent transfer deal. What many people do not notice in the fine print is that when you use that same card for new purchases at 18 percent, you are not allowed to put money against the higher rate until the lower one is paid off.

Example # 3: You study your budget and decide you can afford a $250,000 home, but when you go for pre-approval the bank suggests that you can actually afford $350,000. You excitedly get the nicer place and then 10 months later realize that you can not afford to eat out more than once every other month because the nicer home is busting your budget to you know where.

Grandpa Richard’s advice?

Be brutal in your personal budgeting. Try to pay cash for everything except the house (and MAYBE the car). Do NOT buy the house the bank suggests; buy a more affordable one. If you want a nice house, do NOT buy “toys”. Save towards that “rainy day”. Read books like the “Wealthy Barber”.

One Comment

  1. I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.

    Aaron Wakling

    [G.R. Thank you for the comment Aaron]

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