See: Subprime. See: Market.
It's a market. Just like a normal bond market or a normal stock market or a normal real estate market or even a normal Safeway.
Subprime loans happen all the time, and they're not as dramatic as the name implies. In fact, they're just "below prime," like....loans made to people without excellent credit.
So...how do you attain vaunted subprime status? Eh, maybe you're new to the land of borrowing money, so you have no credit history. Or maybe you did have a history, but didn't realize that you can't just spend without paying, and that loans carry interest.
There are literally millions of subprime loans made out there in the giant financial cloud in the sky. They get traded like stocks and bonds as well. As in: "Hey, I have 143 subprime auto loans that pay an average of 9.7%; 7 of them are late, the rest are fine; durations range from 2.3 to 11.6 years with an average of 6.1 years." (Duration, as in: when the loans are fully paid off.)
Someone buying that, say, $2 million worth of loans would stand to make just under 200 grand a year if everyone paid off on plan, or on schedule. And that's a lot of "yield" in today's world, where prime borrowers pay closer to 3% than 10%.
So...it's a market. Yeah, there's risk. But you as a lender get paid for taking the risk in the form of big, fat, juicy interest rates going to your coffers. Or bumpers. Or curbs. Or whatever you're loaning money for borrowers to do.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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