100 LOAN: REASONS WHY LENDERS PROVIDE IT

2007-03-08 10:33:40

( Financial )



100-percent loan, commonly known as 100 loan, allows you to borrow without a down payment. Lenders let you borrow the full amount you need to purchase the house you want. 100 loan helped many families in the United States to be successful homeowners.


Studies showed that 100 loan have higher rates of defaults on repayments. It also showed that borrowers who are able to put up loan down payments are more financially disciplined and have higher probability of meeting monthly mortgage repayments.

You would wonder why lenders still give out 100 loans given these facts. Lenders observed that the probability of defaults is lowered when property values increase in the market. Increasing property values established equity in houses covered by full mortgage.

Lenders are confident to provide 100 loans due to the advent of sophisticated credit tools to assess borrower’s willingness and capacity to pay off loans. Credit scoring and systematic evaluation prompted lenders to put lesser importance on accumulating loan down payment to access loan.

On the downside, lenders lose more from higher defaults when property prices are decreasing in the market. They will not be able to recover the funds they lent. Home owners with 100 loan have lesser risk when they default on their repayments due to the absence of cash outlay on the loan.

Lenders charge higher interest rate compared to equity loan rates. They also charge a risk premium to protect them in case borrowers default on repayments. The risk premium protects lenders from possible losses they will incur from higher repayment defaults.

Do not just grab a 100 loan just because the lender is willing to give it to you. Analyse first what you will gain and what you will lose when you take a 100 loan. Consider the cost of availing and making repayments. Also, consider the trend of prices of real estate in the market in case you will default on your loan and you need to sell it to pay off the loan.


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