Bow Tie Loan
When you see someone at a party wearing a bow tie, your first thought might be that they have a lot of money, or are the intelligent professor type, or are a regular contributor on Fox. Occasionally, you might be right on all three counts.
With a variable interest rate, a bow tie loan is a short-term loan, and has a predetermined interest rate limit. However, this doesn't mean you're off the hook if interest rates rise above this limit. If they do, the lender tacks on that higher interest amount to be paid when the entire loan comes due at its maturity date.
Example.
Let’s say you take out a $200,000 bow tie loan that has a current interest rate of 10%. The lender has set a limit on the interest rate that it can’t go higher than 15%. If rates do rise to 15%, you'll be paying $30,000 in interest. Sounds like a great deal until interest rates rise to 20%. Normally, you would now have to pay $40,000 in interest, but the lender takes the difference ($40,000 - $30,000 = $10,000) and defers it until the loan becomes due.
This can be viewed as an increase in principal to be paid back, or as deferred interest to be paid at the maturity date. You'll have lower monthly payments, but a larger amount to pay back in the end.
Bow tie loans are something of a rarity, as they're viewed as having contributed to the mortgage crisis of 2008. But for those with substantial finances and the ability to keep track of the deferred interest they're accumulating, a bow tie loan might be attractive. Like...substantially more attractive than the kind of person who typically wears a bow tie.
Related or Semi-related Video
Finance: What is Loan To Value (LTV)?3 Views
Finance allah shmoop What is the loan to value ratio
or ltv All right Well this is the value of
your house for hundred grand This is your down payment
one hundred grand And this is your loan of three
hundred grand loan to value Yeah It's a fraction easy
Three hundred grand over four hundred grand or three over
four or seventy five percent Well what does that mean
Like why do we even care about loan to value
ratio Well because they speak volumes as to how risky
the loan is to the bank or whoever is lending
the dough in this transaction Should you know things go
awry like you get hit by bus and you can't
pay it back How does a bank it's loan back
So you want a low loan to value ratio if
you're the lender because well the worst thing that happens
is that you repossess whatever the asset was that was
pledged as collateral against a loan You just sell it
to somebody else So what are the odds You could
get your money back if you're the bank who loan
three hundred grand against a home that just sold for
four hundred grand Could you drop the price tow three
eighty and then pay twenty thousand dollars in realtor costs
and all the stuff that goes with it And then
you're down to three sixty and maybe there's some other
costs and their ten grand or so you get all
your three hundred thousand dollars loan back and probably fifty
grand to boot and in theory that might go to
the cellar but it probably all go to the banks
lawyers So this equation works great with homes because over
time holmes generally go up in value knock down because
there's more people coming onto the earth again and again
just checked global warming if you're curious about that So
holmes worked great for mortgages and generally accrue lower loan
to value ratios over time But how does this work
when you take out a car loan Yeah cars are
essentially never an investment They're just a money pit They
just go down in value So you really wanted that
forty two two thousand dollars convertible prius with the turbo
charging battery which gave it a zero to sixty rating
of seven point eight seconds rather than the standard prius
Rating zero to sixty of just yes problem You put
ten thousand down and borrowed thirty two grand on what
you hoped would be a five year loan Unfortunately six
months after you drove off the lot the market value
of your turbo prius is only something like thirty thousand
dollars maybe less And in that time period you've only
paid four thousand dollars of principal down on your loan
So you still owe twenty eight thousand bucks on an
asset that today would sell form them maybe thirty and
after commissions transaction costs and lawyer hassle Well it'd certainly
be worth less than that much money toe whoever had
to repossess the car and then sell it that's why
they charge you so much interest rate on car loans
and only can't blame him Cars suffer this very difficult
loan to value equation all the time and it's part
of the reason that car loans air made so difficult
especially when you go through a dealer and why they
push you hard to put down a whole lot of
money up front So the big idea here hi l
tvs are bad low lt v's are good lenin doubt 00:03:11.5 --> [endTime] Go turbo
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