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How does that work? The bank gives you a noncollateralized loan so that you can buy a $20 million property and then they suddenly call the loan? They gave you t

by dpark 10y ago

How does that work? The bank gives you a noncollateralized loan so that you can buy a $20 million property and then they suddenly call the loan? They gave you the loan without proof of ability o pay? I have trouble believing that this is very plausible. It's so risky to both parties that I can't see why the bank would issue the loan. I can't deny that it's technically possible. I just think it's extremely far-fetched.

charlesdm 10y ago
Not really. Even if a loan is collateralized by an asset, that doesn’t mean it is easy to liquidate said asset at full value. For example, let’s say I buy a Monet painting for X million and a bank is willing to give me a collateralised loan of up to 75% of the asset value. If a bank decides to sell that asset tomorrow (i.e. at a suboptimal time) they might not even get 75% of the value back. Debt is a lever in business and some people make it big by leveraging big.
- dpark 10y ago
  Sure. But the bank isn't going to give random Joe a loan to buy a Monet. That's why all this is far-fetched. There are scenarios that could result in 20MM loans being suddenly called. People with little assets generally don't get those loans though. It's doubly far-fetched to talk about loans to individuals for $20MM. If you're applying for a $20MM loan, you should have an accountant and your accountant should have told you to put this kind of thing in a corporation. You'll still lose a lot but it shouldn't bankrupt you personally.
  - charlesdm 10y ago
    Well, it depends on how wealthy you are and the jurisdiction you live in. Loans are not taxable income and if you would have to pay some sort of withholding tax on a dividend (if you would want to borrow against your illiquid shares for example), then it might make sense to take out a personal loan. A bank might also be more keen to give you a loan personally. But yes, obviously not that common. Random Joe won't be getting these. Random Joe doesn't have $20m in assets either, though.

by dpark 10y ago

charlesdm 10y ago

Not really. Even if a loan is collateralized by an asset, that doesn’t mean it is easy to liquidate said asset at full value. For example, let’s say I buy a Monet painting for X million and a bank is willing to give me a collateralised loan of up to 75% of the asset value. If a bank decides to sell that asset tomorrow (i.e. at a suboptimal time) they might not even get 75% of the value back. Debt is a lever in business and some people make it big by leveraging big.

dpark 10y ago
Sure. But the bank isn't going to give random Joe a loan to buy a Monet. That's why all this is far-fetched. There are scenarios that could result in 20MM loans being suddenly called. People with little assets generally don't get those loans though. It's doubly far-fetched to talk about loans to individuals for $20MM. If you're applying for a $20MM loan, you should have an accountant and your accountant should have told you to put this kind of thing in a corporation. You'll still lose a lot but it shouldn't bankrupt you personally.
- charlesdm 10y ago
  Well, it depends on how wealthy you are and the jurisdiction you live in. Loans are not taxable income and if you would have to pay some sort of withholding tax on a dividend (if you would want to borrow against your illiquid shares for example), then it might make sense to take out a personal loan. A bank might also be more keen to give you a loan personally. But yes, obviously not that common. Random Joe won't be getting these. Random Joe doesn't have $20m in assets either, though.