A renegotiable rate is nothing more than a
very short-term loan on an amount that requires a long-term
commitment. This is very similar to a variable
rate loan with one major difference. Here’s how
it works.
If you choose a loan with a renegotiable rate, you’ll
come to an agreement on terms - including the interest rate
to be applied to the loan. The loan terms and interest rates
will be good for a specific period of time, perhaps as short
as one year or as long as ten years. At the end of that term,
the balance
of the loan will be due in what’s known as a balloon
payment. At that point, the buyer and lender come back
to the table to renegotiate the terms and interest rates.
The upside is that this type of loan is often more available
to a person with a less-than-perfect credit history than the
traditional fixed
rate loans because the lender has the opportunity to keep
the loan in line with current interest rates over the course
of the loan. Another positive point is that you’re in
the position to negotiate a lower interest rate, if rates
fall.
On the downside, it means that you’re faced with the
regularly-occurring balloon payment and the lender has the
option to call the loan due. If you’ve fallen behind
in payments, the lender may opt to renew the loan only with
stricter terms and higher interest rates - or not at all.
It also means that if interest rates skyrocket, you’ll
probably find yourself renewing the loan at a higher interest
rate.
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