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Personal Loans Will Play a Key Role In Rebuilding American Financial System

[Nov 24, 2009.]


It may seem like a grandiose statement to make, but it's true: unsecured personal loans will play a key role in rebuilding the American financial system. Here are some thoughts on how:

Lenders Getting Killed With Unpaid Loans

Lenders of all kinds have been watching large portions of their balance sheets burn to the ground as loans of all kinds, from mortgages to payday loans, have not been getting repaid.

With unemployment above ten percent, it's no surprise that nearly 5 percent of total loan outstanding are in default by at least 90 days. Nevertheless, the amount of bad debt weighing down the financial system is staggering and has far-reaching implications.

Americans have become accustomed to being able to get loans when they need them. But there is no guarantee that credit will always be available to borrowers with imperfect credit.

Presidents and Congressmen can tell banks to lend more money until they are blue in the face, but banks are responsible to shareholders, and as such, probably should not make more risky loans until they've handled the horrible situation created by the last batch of risky loans.

At these rates of default, that clean-up could take years.

Luckily, Lenders Can't Make Money If They Don't Make Loans

Fortunately for borrowers looking for unsecured personal loans, lenders can't make money without making loans. Therefore, there is, even as lenders are drowning in bad debt, an inherent motivation for unsecured personal lenders to make unsecured personal loans, even bad credit personal loans.

In fact, some banks, credit unions, and even individuals (LendingClub.com) have actually moved more aggressively into making unsecured personal loans, especially if the borrowers have good credit.

Unsecured personal loans, after all, are profitable products for a lender to purvey--provided that a certain percentage of people repay the loans they are given.

Waiting on Payback Percentages and Borrower Morality

But what is that "certain percentage" of unsecured personal loans that need to be repaid? Lenders, as of now, really don't know. Various factors are at play, chief among them the employment situation, in that it is very difficult to pay back a loan when there is no income coming in.

One factor that affects personal loan payback percentages that is often underestimated, though, is borrower morality. Do people who take out loans still believe that they should be repaid? Are contracts still valid in this country? Or is skipping out on a personal loan "no big deal?"

How people answer those questions right now affects not only the market for personal loans, specifically the interest rates and terms offered, but also the American financial system as a whole.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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