Debt Consolidation Depot
Debt Consolidation & Financial Information Resource Center
March 6, 2004
Discover the truth why people with credit problems pay higher rates.
An ex-mortgage broker spills the beans.
(PRWEB) -- Let's face it. People with credit problems pay higher rates for
the same reason people pay higher auto insurance premiums - risk. Virtually
everyone knows if you receive a traffic ticket, you get points on your
driving record and an increase in your insurance premium. Why? Because the
traffic ticket has created an emerging pattern of risk. If you got one
traffic ticket, the chances of receiving another one are now greater than
when you had no tickets. Therefore, there is a greater likelihood of you
filing a claim in the future. A speeding ticket can lead to accidents,
property damage or even vehicular manslaughter. All of which pose a real
risk of the insurance company paying a claim. The more claims the company
pays, the less money they have to pay other claims and make sound
investments to pay future claims.
The credit world is similar. If you pay your bills late, your credit score
decreases and the interest rate on your next financing increases. Why?
Because the late payment has created an emerging pattern of risk. Whatever
the reason for your late payment is the basis for future late payments. For
example, if you have been living beyond your means buying items on credit
because you can't afford to pay cash, this causes larger monthly payments.
When it gets to the point of causing a late payment, it's most likely to
continue because you have demonstrated you don't have enough money to pay
your bills. Hence, there is a greater chance of frequent or severe
delinquency in the future. But the real world credit market differs from the
insurance comparison due to one more factor - opportunity.
Lenders are not required to loan you money. Afterall, from their
perspective, they are comparable to annuity investors. That's right -
investors. Suppose you were buying an annuity that would pay you monthly for
30 years. You could choose Annuity X that pays in full and on time every
month with a rating of "A." Or you could select Annuity Z that sometimes
pays late and sometimes misses a payment completely with a rating of "B." As
an investor who may not get paid entirely by choosing Annuity Z, it's only
fair that you require a higher yield - or return on investment - in exchange
for accepting the extra risk of losing your money. If the investor is not
comfortable with the added risk, they could exercise their right of
opportunity and choose Annuity X. It pays a lower yield. But they are
relatively assured they will receive all their money in full and on time.
Now let's flip the perspective back to lending. In the above investor
example, replace the words investor with lender, yield with interest rate
and annuity with mortgage loan. Now we see a more clear picture. Borrower A
who pays in full and on time every month is a low risk and receives the
lower interest rate because the lender is relatively assured of receiving
their money. Borrower B is a much higher risk and pays the higher interest
rate because the lender is accepting the chance they may not be repaid all
their money.
Now let's take it a step further. Imagine you had $100,000 to invest and had
to choose between Borrower A and Borrower B. Which one would get your money?
Moreover, why not loan $100,000 to Borrower B at the same rate as Borrower
A? Afterall, "B" borrowers often claim they no longer have the same problems
that caused their delinquency. "They turned a new leaf." Yet, they haven't
proven it. They still pay their bills late. Would you take them at their
word and give them the same rate as Borrower A? A true investor would not.
In conclusion, it's as simple as risk and opportunity. Contrary to the
divisive manipulation of data from the media and organizations with an
agenda, people with credit problems pay higher rates because they are a
higher investment risk - period. It has nothing to do with race, religion,
ethnicity or national origin. From my experience in the mortgage business,
loan officers only care about one color - green!
© 2003 SonicPoint.com.
Editor's Note: Dave Czach has 12 years experience in the mortgage business
and a Bachelor's Degree in Real Estate. Discover 21 more "gotta-have-it"
articles in the free mortgage calculator software located at http://myLoanHero.com
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© 2004 DebtConslidationDepot.com