Thursday, December 11, 2014

Would you loan money to this guy?

by Bill McBride on 12/11/2014 07:11:00 PM

Would you make an unsecured personal loan to an individual so they can pay off $14,000 in credit card debt? If so, at what interest rate (the credit card debt is at 17%). The person has a 15 year credit history, a FICO score of 699, an annual income of $73,000 and a DTI of 17% (excluding mortgage debt).

Maybe for a close friend or family member, I'd consider helping - if I knew all the circumstances.  However, for everyone else, my answer isn't no, it is Hell No!

The first guideline of personal finance is to pay off your credit card balance every month (with exceptions for extraordinary events). This person has a 15 year credit history - is probably in their 30s - and still can't pay off their credit card balance every month?

Maybe there was an extraordinary event - medical bills for a family member or maybe the borrower lost their job for some time.  That would make a difference.   But for most borrowers, I suspect they have just lived a little beyond their means.

If so, imagine what will happen after they pay off their credit card. In a year or two, it seems likely they will have run up their credit card debt again.

As long as the economy is expanding, and the person keeps their job - they will probably pay this personal loan.   So, with no recession on the horizon, a 3 year loan right now will probably perform well.  But what happens during the next recession?

This is the average Lending Club borrower (that they call "quality").    Yes - an individual lender can diversify among a number of borrowers of the same credit quality (that is less risky than lending to one person), but this isn't for me.

• At 8:30 AM ET, the Producer Price Index for November from the BLS. The consensus is for a 0.1% decrease in prices, and a 0.1% increase in core PPI.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (preliminary for December). The consensus is for a reading of 89.5, up from 88.8 in November.