Secured Loans — Pay now, pay more later

Twice in the last two weeks I have talked to people who had a significant piece of collateral reposessed, and after applying the proceeds the lender tried to tell them that they now owed more than they had originally borrowed.

These are not reverse amortization or interest only loans. These are aggressive repo. and attorney fees plus a healthy spice of late fees, penalties and interest charges.

The borrower now has limited options:

  • Pay more in a deficiency than the original principal balance;
  • Hire a lawyer, and probably an accountant as well, to challenge the lender’s collection and accounting procedures; or
  • File for bankruptcy.

So, why should borrowers give collateral for a loan if they are going to wind up in more trouble in the event of default than if they hadn’t? Why not pay a slightly higher interest rate (and both of these people could have gotten the loans as unsecured loans at the time they were made), buy the collateral, own it free and clear, claim it as exempt if it is a vehicle; and then if there is a default — keep the collateral and owe LESS money, because of fewer opportunities to assess repo. and collection charges?

When did we change the rules so that you have to be a sucker to do a secured loan?


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