Expert Commentary

Deflation Alert: OILs - The New Crack Cocaine of Credit

With the demise of Payday lenders, consumers are taking on costlier debt. Yet another unintended consequence of regulation.

EWI and the Socionomics Institute have been writing for decades about the tendency for government regulation to have the opposite effect that is intended. Mainly, this is because a government is the "ultimate crowd" and so is normally always last to work out how the horse got out of the barn. It follows, therefore, that government action is chronically trying to shut stable doors long after the steeds have bolted.

The latest example of this phenomena comes with the growth of Online Installment Loans (OILs). These are consumer loans for anything from a few hundred dollars to thousands that are paid back in regular installments over a period of many months. Interest rates on the loans are punitive -- pick your dope for anything between 30% and 150% per annum.

This sounds a lot like Payday loans but there's a crucial difference. Payday loans are paid back quickly (on payday) but the duration of OILs is much longer. This increases the risk to the lender of course, but it also increases the cost to the borrower.

Governments have cracked down on Payday lenders, putting many out of business. But that regulation has driven hard-up consumers into bigger and costlier loans like OILs

Also, OILs are targeted not just at consumers with the worst credit rating but those who are considered moderate risk. According to a Bloomberg article, Elevate Credit Inc., an OIL provider, has an average online subprime installment loan customer who has an annual income of around $52,000. 80% have been to college and 30% own a home. Perhaps most shockingly, more than 10% of the company's core customer base makes over $100,000 a year. That stat alone is a damning indictment of just how addicted to credit many western societies have become. You're making a hundred grand a year and yet you still need to borrow cash at "crazy-percent" per annum? Of course there are many social issues that people will point to in order to justify the growth of consumer credit and many of them are valid. But, as socionomists, we view issues such as the so-called "wealth gap" as a symptom of a natural cycle in social mood. This cyclical nature means that, at some point, these issues will wane.

In the meantime, though, consumers continue to gorge on credit. And in a rhyme with the sub-prime housing crisis, the Bloomberg article also points out that OILs are now being bundled into securities for sale to bond investors, the idea being that putting all the riskiest loans together somehow makes it less risky. Like that worked out last time? "OILs" well that ends well? Probably not!

191105 - MG