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Subprime lending and the credit crisis came about when competing lenders ignored credit ratings and approved finance to increase their client base. The problem was that the recipients of the loans couldn’t meet their repayment requirements when it came down to the crunch. The lenders had borrowed money themselves at lower interest rates and now find it hard or near impossible to repay their debt.

If credit requirements of the last 5 years let you run up

A$300,000 for a property
A$35,000 for a car
A$5,000 on the credit card
A$10,000 on furniture and homewares
A$5,000 for an overseas trip

Home
$300,000
$1,794 per month
over 30 years, 5.79% p.a.
$1,895 per month
over 25 years, 5.79% p.a.

Credit Card
$5,000
$79 per month
18.75% p.a.

Personal Loans
$15,000
$290 per month
over 7 years, 13.75% p.a.

Car
$35,000
$810 per month
Over 5 years, 13.75%

Other costs incurred
Food, home supplies, home insurance, car insurance, petrol, clothes, transport, mobile phone, electricity, water, council rates and everything else you need to live.

You may consider a cable TV plan for your 50″ plasma, or because your friends do it, keep up with the Jones’ and get a boat, a membership in a ski lodge, plan an annual holiday at a resort you can no longer afford and pretend to be happy with your 5 year old car, TV, furniture, home and marriage. The interest rates go up. You hear on the news that there were so many people defaulting on home loans and you learn a new phrase: “subprime lending”.

Foreclosure of businesses ensue. People can’t afford to live the same lifestyles so spend less money. Trade gets flooded with people selling their money hungry assets. Consumers spending less means less profits for retail outlets. Retailers downsize in hopes to conserve money. Downsizing their shopfronts and staffing then slows down their demand from their suppliers. Suppliers then downsize their supply chain. Everyone talks about their job security and become competitive with their co-workers and try not to move, fearing the job market has run dry. Because there’s no contract stating that you’ll be employed every month for the next 30 years, you save what money you can and help bring the consumer spending index lower, while retaining the same job with the same pay.

Rut

Government assistance draws money from tax payer surplus and can be seen as taking money away from education and health. You empathise with those around you who are worse off. You tell everyone you care about of the new position you saw advertised whilst on your lunch break. You offer to take your friends out for dinner, your shout, because you’re sick of cheap frozen dinners. The seafood and the catchup was so great you all arrange to meet again in two weeks. When you have a dinner party, you begin to realise that everyone managed to bring vast amounts of food, good wine and they’ve dressed nice. You’ve all been saving your money and worrying about your jobs, loans and other expenses, you haven’t made time to enjoy with your friends. You all  agree that your consumer spending spree days are over, and you can enjoy the company of others without the extensions on the house, without the new car and without the photos from your annual overseas vacation.

Try not to worry about it too much. Speak up about your concerns with your landlord, lender, family and friends. The housing and share markets will come back up. The lenders will come back with better strategies. Everyone will learn from their mistakes and tell their grandchildren about it in 30 years time.

Last post by Karl

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Tags: car, debt, house, lending, loan, Mortgage, Property, rent, subprime

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