# If I can put together a loan that pays out like a 7.579%-a-year loan, but has a total term of 18.63 years … would you be interested?

I'm reading about Household International's fraudulent mortgage interest rate. According to Michael Lewis, Household disguised a 15 year, fixed-rate loan as a thirty-year loan. The sales would offer to replace a client's existing \$67,300 mortgage (8.5% interest rate) with a bigger but seemingly cheaper one: \$86,300 at an “effective rate” of 7.6%. The sales pitch goes something like this: “If I can put together a loan that pays out like a 7.579%-a-year loan, but has a total term of 18.63 years … would you be interested?”

Can someone explain how exactly does the trick work? How did the sales misrepresent the 7.6% interest rate, which is seemingly lower than the client's existing 8.5% interest rate?

• The key missing part on their statement is If I can put together a loan that pays out to us like a (...) Jul 19, 2017 at 15:23
• If a salesman asked me that question I would tell them no, simply on the basis that I have no idea what they are really claiming.
– user12515
Jul 19, 2017 at 17:00
• @Michael That's a sound rule of thumb in any transaction. Any time I hear "can you tell me why you wouldn't want...." or "would you be interested in..." I know I'm being set up. Even if it turned out be a valid offer I'd be afraid that their subversive tactics to get me in the door would lead to more dishonesty later. Jul 20, 2017 at 2:49
• A simple answer is, they are being slippery with different concepts such as "overall" interest rate ("but measured yearly") versus "yearly" interest rate. it's just silly. Jul 20, 2017 at 15:07

A loan with a term of 18yrs 8mo on initial principal of \$86,300 at an annual rate of 12.2% would require 224 payments of \$979 for a total of about \$219k, of which \$133k interest (rounding to the nearest 1k).

A loan with a term of 30yrs on initial principal of \$86,300 at an annual rate of 7.6% would require 360 payments of \$608 for a total of about \$219k, of which \$133k interest.

Household was claiming that because the total amount of interest paid was the same on this ~19yr loan as on a standard 30-yr fixed loan at 7.6%, the rate was "effectively" 7.6%.

If the rate were truly 7.6% on a loan term of 18yr 8mo, the amortization table would call for 224 payments of \$721 for a total of about \$162k, of which \$75k interest, quite different from the loan offered.

• If we add 6K of the fees then it would be more horrible. Jul 19, 2017 at 12:12
• @dheer, per the article, the 6K in fees is already included in the 86k loan (prior mortgage of 67K + personal loan of 12k = ... 86k). There's also the additional 5k second mortgage at 23.9% added at the closing, more horrible yet. Jul 19, 2017 at 12:18
• If I am understanding the answers here correctly, are you essentially saying that it was simply a lie? Household was selling loan X at interest rate 12%, but they deceitfully advertised X's interest rate as 7% because some other, unrelated loan Y had interest 7%? Sounds straight-up a lie. And to trick people they used the old magic-act misdirection, showing some very irrelevant logic about how the total interest paid would be the same, which has nothing to do with anything? Jul 19, 2017 at 16:38
• And, if the answer to my above request for clarification is "Yes, you are understanding the situation more or less," then I have a car to sell you. It is an original Maserati. You are not aloud to look at it first; I maintain that this vehicle is a Maserati because the price is the same as one. Jul 19, 2017 at 16:44
• @Aaron, that pretty well summarizes it as I read the linked article. Please don't sell the Maserati to me, but you might see if any former Household sales reps would be interested. The article also leaves it unclear to what degree this was misrepresentation by the sales rep, and to what degree it was a sleight-of-tongue promoted by the company. My guess would be an especially dishonest rep working in the framework of a dishonest company culture. But that's just my prejudice speaking. Jul 19, 2017 at 17:01

The short answer is that they made up a new rate called it "effective" rate, and presented it as if it were the APR. AFAIK, creditors are supposed to disclose APR of a loan. Thus the situation presented would be fraud.

Household was offering 19-year loans at an interest rate of 12.2%. They showed potential clients worksheets with an "effective interest rate" of 7.6%. If the client took out a 30-year loan at the effective interest rate then they would pay the same amount of interest.

• Effectively if the client had made the same extra payments to the existing loan of 8.5%; by the computation used it would have been effective as maybe 5%. Jul 19, 2017 at 11:42
• This is backwards. The offered loan was for 19 years at 12.2%, but Household quoted the interest rate that would be required on a 30 year loan to produce the same total interest. Jul 19, 2017 at 11:44
• @user4556274 You're right, I did flip that Jul 19, 2017 at 11:59
• Nice counter example of how similar but different misinformation can be spread. Jul 19, 2017 at 12:23