Everyone likes simplicity. Regularity. But, quite often, the more simple things are, the less lucrative. An example is simple interest. It's easy to figure, but compound interest is a lot more profitable to the lender.
Lenders would like every payment to come in on the last day of each month. They would like to be able to impose late payments for every payment not received when due. And they'd like to be able to foreclose, get the property back, and resell it without missing a payment. Unfortunately, the world doesn't work this way.
Many loans are foreclosed by institutional lenders who rigidly adhere to their own 'world-view' of simplicity and regularity. I've seen instances in which a borrower has tendered $450 fora $500 mortgage payment, and promised to make up the difference within a matter of days; only to have the lender return the payment check uncashed. To add insult to injury, the lender has also tacked on late fees that the borrower has already explained he can't pay until later.
In the real world, a borrower who is in need of cash, and who can't even afford to make his house payment in full, confronts a combination of frustration and temptation that's almost too much to resist. On the one hand, he has tried earnestly to make his payments, only to be rebuffed with a returned check and with added late charges. On the other hand, here's all that cash that the lender apparently doesn't want this month. It's often immediately applied to other pressing financial concerns where the recipient is only too glad to be paid something on account.
The following month, the borrower is now two payments in arrears, and even in less likely financial position to make both payments on time. By the third month, he's given up. The loan goes into default, and the property goes into foreclosure. The fault isn't the borrowers every time. Quite often, its the fault of the lender who doesn't recognize that not everyone's income stream is received at regular intervals at the end of each month.
This was brought home to me by an over-the-road trucker to whom I'd sold a home on a contract. He could be counted on to be late with his payment several months out of the year. Why? Because he was either out of town when the payment should have been made, or, he just didn't have the funds with which to make his payments. The cause of this was fundamental.
Income from his trucking contracts was seasonal because he dealt with agricultural products. They were also subject to fluctuation caused by changes in the price of fuel,unscheduled maintenance costs – such as when he had to spend $4000 on his engine repair just to get home – and competition from other truckers.
Because I was a principal in the arrangement rather than a bureaucratic bank employee, rather than foreclose out of hand, I sat down with the trucker and re-wrote his loant o accommodate his situation. Here's what we did:
His note had been for $62,500 payable at 7% per year in monthly payments of $405.01 plus tax and insurance impounds of another $107, or $512.01, with a single balloon payment due in 5 years. I re-wrote the note at 8.5% annual interest rates, but I stipulated in the Note that so long as 9 payments were received on time in any year and I was advised in writing in advance when a payment would be missing, the note would be considered current and in good standing.
Interest would continue to accrue and compound on the principal balance from time to time remaining unpaid, so I didn't lose any interest on the deal. By structuring 'stutter'payments, we kept him in good standing for the remainder of the Note term.
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