Financial personality Dave Ramsey has spoken with many callers on "The Ramsey Show" who took out loans to buy livestock. Even with decades of experience, Ramsey was in disbelief when he heard that a 20-year-old got access to a $100,000 loan to buy 25 cattle.
"Who gave a 20-year-old a $100,000 cow loan," Ramsey asked.
The details emerged later on, but there were a few red flags that Ramsey brought up.
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How The 20-Year-Old Got A $100,000 Loan
Initially, it seems reckless to give a 20-year-old college student a $100,000 loan for his cattle business. However, he's not in it alone. He and his father have been in the cattle business for 10 years. They recently sold their entire herd and reinvested profits back into the business, but the way they reinvested profits didn't please Ramsey.
As it stands, the 20-year-old has a $100,000 CD. He borrowed against the CD to take out a $100,000 loan. Ramsey remarked that the bank isn't as reckless as he thought they were, but he wasn't pleased that the caller borrowed money.
Ramsey suggested that it would have been better to get out of the CD and use that money to buy cattle instead of resorting to a loan against that CD. We don't know the terms of the loan and CD, but most loans have higher interest rates than CDs, resulting in a net gain for the bank.
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Overconfidence About Commodity Price Trends Is Dangerous
Another red flag emerged when the caller said he has been studying the beef market for a while and is confident that the market will stay where it's at for the next two years. Ramsey did not like this level of confidence one bit and compared it to gambling. He then explained that it's impossible to predict commodities prices over a long period of time, just as it's difficult to say with certainty what will happen with a stock in a few years.
"Your math was a wild guess," Ramsey said.
Ramsey suggested that the 20-year-old do more research on commodities. He said that supply and demand are the key forces that influence commodities prices. An oversupply of cows will translate into lower beef prices, especially if demand stays the same. However, if demand soars and there are fewer cows, beef prices will go up.
[SRC] https://finance.yahoo.com/news/gave-20-old-100-000-010045641.html