In our view, the massive growth in unsecured lending over the past couple years has been driven by a ‘gold rush’ mentality on the part of credit suppliers. With the economy at large growing slowly, but cost pressures biting the banks’ bottom line year after year, lenders are desperately seek high margin revenue growth from this source. Low and middle income consumers are responding to open credit taps in the affirmative, typically with little understanding of the true cost of these funds. Rather than reduce consumption, they are supplementing current income with unsecured credit. For this short-term assistance, which often morphs into a long-term debt trap, consumers are paying a substantial penalty in the form of high rates and fees. Unless the rate of loan growth immediately slows down across the industry, we think this nascent bubble will inevitably wreak havoc on the economy and millions of families when it bursts.
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