Why charge interest at all? - Posted by Mike

Posted by brad on April 04, 2002 at 08:31:44:

just my two cents…without interest you have less control…what i mean is with interest you have a set amount of time that you are loaning someone money,selling them a home, what ever…without it the pressure is not there to get them to make on time payments unless there is a late fee. and remember the value of money. no mater how much profit you get if the deal streaches over time inflation eats the profit. also it doesn’t seem like as much and is easier to sell a place a grand down and 5 more at ten percent than it is to sell the same place for a grand down and 10 over the same period. it just sounds better and is more attractive to the buyer. my morgage is for 84000. payed over 30 years its 220something. do you think that i would have purchassed at 220 with no interest even though that is the same thing. not a chance. interest also gives the buyer a chance to get ahead and profit/save by paying early.

Why charge interest at all? - Posted by Mike

Posted by Mike on April 04, 2002 at 24:11:32:

Yeah, I know the simple is answer is “more money” duh!!

But seriously… If you do a real Lonnie Deal, you are already making 100% profit. If I bought a MH for $3k, and sold it for $6k, (and had no other expenses) I would make 100% profit, assuming they pay everything.

Why complicate it with interest payments? Then you have to get all complicated with tax on the interest, etc…etc…

Isn’t simply 100% profit…“good nuff?”

Would be interested in hearing any responses. It is late, And I have been taking LOTS of alergy medicine, so slap me if this is totaly stupid.

Re: Why charge interest at all? - Posted by Karl (Oh)

Posted by Karl (Oh) on April 04, 2002 at 09:12:57:

You can certainly do it any way you want. There?s no doubt it makes sense to keep things simple. It makes life easier for you, and your buyers will appreciate it. But if you don?t charge interest, you?re giving away money. I?ve never had a buyer argue about my 12.75% interest rate. In the used MH market, that?s a pretty good rate. After all, what bank would loan money without charging interest?

Take your $6k home example. If you charge 12.75% and collect $250 a month, you?ll earn $963 in interest over the life of the loan. It?s just as easy to collect $250 per month for 28 months as it is for 24 months. The difference is the interest charged. It?s not complicated to keep track of interest earned. Don?t eliminate charging interest because you think it will make tax time easier. I finished my taxes last night with my tax attorney, and adding up all the interest I earned last year on my notes was the easiest part of the whole evening.

When I first started, I did try to charge a $500 closing cost. I outraged a couple buyers, so I stopped. I guess the banks can keep that one.

Now if you?re really set against charging interest, just make your sell price $7k, and you?ll end up with the same results.

Karl Kleiner

Re: Why charge interest at all? - Posted by David (OH)

Posted by David (OH) on April 04, 2002 at 08:33:15:

You are correct that your real profit comes when you buy right and sell at market value. The interest is just gravy. I’ve considered this approach of no/low interest, not out of convenience because it really isn’t that hard, but more for a negotiation tool. If a buyer is on the border of buying/walking, maybe offering a reduced interest rate might put them over to the buy side.

“Mr./Ms. Buyer, I can tell you are hesitant. If I could reduce the interest rate from 12% to say 6% (or 0%), would that help you make up your mind? I believe you would enjoy this home, and you have proven yourself a worthy buyer by saving that down payment, I would be willing to reward your effort with the better rate. I don’t normally do this, but you are the type of person I want to loan money to. Heck, you cant even get a loan like that at a bank with excellent credit. It would sway you decision? Great, lets write up the contract. If you can get your park application in by tomorrow I would be glad to give you that great rate.”

One thing to consider about charging no interest, I believe there is a minimum rate you are allowed to charge for tax purposes. If you extend a loan at 0% interest, I think you would be responsible for paying tax on a minimum amount of interest even if you don’t collect it. I don’t really understand it, but I think that is the general idea. And talk about inconvenience, paying tax on money not collected. Yuck!!