What I don't understand is how they pay off the loans without triggering a tax event from liquidating capital to do so. Like the loans are always small enough to be paid using the low amounts of taxed income?
Interest accrues, it's not paid.
Then the debt is rolled over into a new loan for a larger amount.
As long as the collateral increases in value faster than the interest rate, this can continue indefinitely.
what bank would finance this? this is such insane risk. as soon as the stock market hits a recession, the bank will call the loan, and the borrower will be bankrupt.
The banks are likely not holding the loans. They're likely selling the right to the cashflows to an investment firm in exchange for a lump sum of cash more than the value of the loan but less than the total interest collected over the life of the loan. Depending on the composition of the portfolio, various funds may want exposure to the underlying assets and so may be willing to take on the concentrated risk.
While not about these loans specifically, the principles described in [0] apply. Check the section "who buys mortgages?"
[0]https://www.bitsaboutmoney.com/archive/mortgages-are-a-manuf...
Lots of private banks will do this.
You live in “consumer finance” land, and understand its rules. In that world, the banks have most of the power.
In “private banking” land, especially at the high end, the client can have a lot of power.
I’m not saying that Tesla, SpaceX, etc might choose their banking relationships, who underwrites their IPOs, etc based on who gave their CEO the best personal deal on the private banking side.
Because that would be wrong.
I would either renegotiate the loan or, almost equivalent, get a second loan to pay off the first one.
(2021)