Unsecured Credit: The Importance of Selection and Post-Loan Management

An extreme level of focus on prospect selection and management of loans after they are made, among other factors, are key to generating strong unlevered returns for investors. The job market remains strong, household incomes are rising and households have deleveraged significantly relative to pre-Great Recession levels (Charts 1 & 2). We exclude student loans from Chart 2 because they are a hybrid form of debt that is not relevant to many households.

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Although households have cleaned up their balance sheets, lenders have had to lean against rising medium-term interest rates. The difference between the response by the credit card and personal loan sectors is very stark indeed (Charts 3 & 4). Credit card issuers have rapidly increased rates in order to maintain spreads. However, raising rates is exactly the wrong kind of behavior for maximizing returns in the long-run.

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A detailed examination of credit performance among various issuers is beyond the scope of this post, but it is noteworthy that serious delinquencies began rising in early-2017 and have caught up with the more evenly-rising personal loans. A look at the loss profiles of the two sectors during the recession is worth a thousand words and highlights the importance of selecting the right borrowers who make responsible decisions.

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Of course, bad things happen to good people all the time and the economy will eventually begin to slow down – taking the job market with it. Loan management post-close is where Aliya sets itself apart. No matter how good the underwriting process is, there will always be losses during a recession. In a negative economic scenario, the differential factor driving performance will be identifying borrowers who are at or near financial distress and prevent them from entering a downward spiral.