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 a Savings & Loan v. a B...187 Views
finance a la shmoop what is a savings and loan versus a bank all right
savings and loan some savings and loans yeah it's a cleverly named you know like [Case of cash appears]
home loans car loans stuff like that banks issuer of credit cards and big
lines of credit for small to large business savings and loans the little
local retail gal banks the big fat cat corporate dude with big appetites and [Woman sitting behind savings and loans desk]
small fast red convertible cars with a stick-shift
savings and loans owned either by the lenders and borrowers of the savings and
loan itself you know kinda like a co-op or it can be set up like you know normal
ish corporation banks usually owned just by shareholders some are big like this
guy and that guy yeah and there's a whole bunch of other small fries too
savings and loans can loan up to 20% of their assets half of that for big [Savings and loans assets pie chart appears]
business half of that for small business loans at least these days and why did
delineation well because small business is default a whole lot more than big
businesses savings and loans are allowed to tap into the very liquid Federal Home
Loan Bank system Fannie Mae in the gang those guys and in order to do that ie [Man with savings and loans briefcase for head appears]
get cheaper money in return SNL's have to have at least 65% of their assets
invested in residential mortgages meaning most of their loans are you know
small home mortgages a lot of first-time buyers there all right well why is this
a thing well because the American Dream from a political perspective revolves in [A couple moving into house]
large part around owning your own home right not a bad idea the government has [Uncle Sam appears and boy walks away with pile of cash]
gone to a whole lot of effort to make it easy for the little guy to borrow money
and have his or her own little castle a little to start anyway banks those cold [Boy dancing outside castle]
cruel concrete walled things don't live under this same structure they don't get
to tap into the same cash fool reserves that SNL's do is not all the time but
they get to loan money a more or less wherever they want to loan money there's
way fewer strictures on banks than SNL's banks exist to make money for the
shareholders of the bank duh and they're financially Darwinian beasts [Charles Darwin beast appears in misty forest]
good at lending money that costs them low rates to rent and then they rent it
out at much higher rates to customers right and they live on that spread so
banks also get hot and heavy with other kinds of borrowings things like credit [Man and woman sitting in car looking at sunset]
card issuance like I think about how much money your credit cards charges and
so on they get a big piece of that and servicing a debt you know and wealth
and/or financial management services like they take a percent of year or so
for managing all your dough and to some extent merchants and investment banking
services as well you know for the big guys who are global so banks think big
loans big money big spreads wholesale savings and loans think small loans
small money small spreads retail banks mr. Potter savings and loans [Mr Potter appears]
George Bailey and the rest of the Bedford Falls gang did you hear that a
video editor just got his wings [Man grows wings]
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