Earlier posts here and here noted Alex Tabarrok’s clever characterization of folks who criticized development of new lending vehicles for folks with low incomes or bad credit. Thus, this Economist article about a recent study on making loans to the poor caught my eye. Check out the conclusion of the study:
Contrary to the fears of the credit snobs, the readier access to credit did not tempt the new customers into a debt trap. Over 15-27 months, those reconsidered for a loan were more likely to have a formal credit score. And this score suffered no harm as a result of their easier borrowing.
Overall, the study suggests that profit-seeking lenders do not deserve the fate Dante reserved for them. Far from tempting the poor into unpayable debt, they help them keep their jobs, put food on the table, and build up a credit history. The authors show that poor people can make good use of borrowed money, even if they sometimes struggle to demonstrate this creditworthiness to lenders. If not hell, that is a kind of purgatory.
Read the entire article.
I am not too fond of the term “credit snob” because, in the end, it is merely an ad hominem.
However, I really don’t understand their thinking. Even if the default rate is, say 10%, that means that 90% of the borrowers are successful. In the case of sub prime borrowing for housing, it means that 90% actually get to buy a house they would not otherwise have had the opportunity to buy and own. Who am I, or anybody else, to say that they should not do so because the borrowing is too expensive?
So, why would anyone want to take the opportunity away from 90% in order to save the 10%?
Rick