How To

Beware, there’s no asset ownership at the end of these loans

Photo: David M. Goehring

I posted a question on my Twitter account a few weeks ago and I was pleasantly surprised to get dozens of answers to my impromptu credit quiz. In fact, I got so many that I decided to fashion it into an article and hopefully prompt some more discussion on the matter. Here’s the pop quiz…

“Name an installment loan (fixed payments for a fixed period of time) where you DON’T own the asset when you’re done making payments.”

Here are the top five answers I received, in order of frequency;

1. Student Loans

I was surprised to see this as the number one answer, but not that surprised. The topic of whether or not to borrow a lot of money to go to college, thus incurring installment debt, is a lightening rod, to say the least. Here’s an article I wrote for Mint last year where I blasted the idea of taking on a lot of student loan debt for the sake of going to an expensive school. And, in turn, got blasted back by about a fourth of the 130 comments that were posted.

I don’t think you can say that an education and a degree aren’t assets. But, I do think you have to consider the “I didn’t got to college and I’m still successful” argument, which is possibly why so many people think student loans don’t yield any sort of asset. In the strictest definition of an installment loan, an education isn’t tangible and it doesn’t secure any sort of loan obligation. I mean, a lender can’t repossess your knowledge for non-payment. Semantics, I know.

2. Auto Leases

Now we’re talking. Borrowing money to buy a car is one of the worst investments you can make because of the quickly depreciating value of the asset. But, at the very least you’ll own the car after 36, 48 or 60 months of payments. With a lease you’re essentially renting a car for some fixed period of time.

Even when you’re done making lease payments you don’t own a thing. In fact, in many cases you’ll owe still more at the end of the lease because of mileage that exceeds the maximum contractual allotment. If you like a new car every few years then leasing is a good option but you’ll be making car payments perpetually. If you want to drive something supercool every once in a while then call HERTZ instead. You can give it back at the end of the weekend.

3. Rent

Correct. You own nothing after satisfying your rental agreement, which is technically an installment agreement. The tenant gets a place to live (the “extension of credit”) and makes an equal payment to the landlord (the “creditor”) for a fixed number of months per contract (the “loan term”).

Don’t get me wrong; there are tens of millions of homeowners who would rather be home-renters right now because they’re upside down on the home loans. That’s a familiar position to be in with auto loans, but not mortgages. Tax deduction notwithstanding, renting ain’t a bad deal right now.

4. Title Loans

Good one. You know what these are, right? You take your car title (yes, you have to have clear title in hand) to this vulture of a lender who then gladly let’s you borrow about 50% of your car’s appraised value and expects you to smile about it while he hopes you default.  You make payments of some amount over some period of time and you get your title back.  I fully agree that a car’s title is a tangible asset, but you’ve already earned it by paying off another loan.  Buying it back again…not so much.

5. P2P Lending

Yes, and no. P2P loans (peer-to-peer) occur when you borrow money from another person or group of people who act as the “lender” in the transaction and cobble together the funds to lend. There are several sites that facilitate P2P loans but since I’m not a fan of them I’ll let you find them on your own.

Peer-to-peer loans are, in fact, installment loans and some of them are attached to an asset. Some P2P loans are taken out to pay for orthodontic work, business equipment and yes, even plastic surgery. Still, just as many are taken out to pay for vacations and other non-tangible items. Regardless, defaulting on a P2P loan won’t result in the consumers/lenders showing up at your door. I think that’s a contributing reason for their high default rate … it’s hard to think about Joe the Consumer Lender like you think about Wells Fargo or Citibank.

What about plastic?

I’m a little surprised, and worried, that nobody listed credit card debt as not being tied to an asset. Have you ever heard of a credit card issuer repossessing clothing, vacations, dinner out, or anything else charged on a credit card?

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.