by Tim Giles

Created on: April 24, 2009

Borrowing

I recently applied to refinance my three year old mortgage with a mortgage broker. He was concerned by the ratio of credit card payments to gross income. Most of this was an American Express card which we use for sky-miles and always pay on time.

A bigger problem, from my point of view, was our home equity loan which was 23% of the outstanding balance of the primary mortgage. This got me thinking about how easy it is to obtain credit.

I recall about 30 years ago getting a loan from a finance company like Household Finance or Dial. I do not recall the application process, but imagined it to involve a scrutiny of my salary and other credit obligations. Not so said a banker friend. Those companies front ended the interest and sold off the paper

Establishing the credit worthiness of a prospective borrower is a skill that banks should have, but apparently don't have now even if they ever did. Witness the peer to peer lending on the internet. Banks have sloughed off to issuing credit cards and home equity loans.

Home equity loans are bad for the borrower. There's no authentication of the borrower's ability to repay. There's simply the possibility, depending on the current house appraisal, of value that can be obtained at sale. They originated from a gift of Congress which restricted interest deductibility in the tax code to real estate loans. Previously, all loan interest, including credit card and life insurance cash value loans, was tax deductible.

Is there a viable formula for determining a reasonable loan re-payment percentage of salary? If so, it would seem to vary by income level. Should it be determined by government regulation? How many people really know what their expenses are for the various categories and which are optional?

I remember talking with a runner who told me he never ran outdoors if the temperature was below 28 degrees, in which case he ran inside on his treadmill. He was saving for a new treadmill which costs $2,800 and he had already saved $1,700. I wondered if he had a piggy bank or a Christmas club. How do you save $2,800? It occurred to me that I never had saved for anything, even when I was a kid. If I wanted a treadmill, I'd use a credit card.

It's a jungle out there. Before you borrow, check your expenses to be sure there is enough of your income left over each month to make the loan payments. Better yet, live below your income and avoid borrowing.

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