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Does the availability of debt for individuals really vary that much in a high vs low interest rate environment? I feel like high interest debt is available whet
by sokoloff 3y ago
Does the availability of debt for individuals really vary that much in a high vs low interest rate environment? I feel like high interest debt is available whether the Fed funds rate is 0.75% and when it's 5.50%.
- naniwaduni 3y agoPeople at the margins have a lot more trouble accessing even high-interest debt than you probably do. Some of them actually have nontrivial default risk that makes even arbitrarily high interest rates plausibly not worth it.
- sokoloff 3y agoSure. Does that availability change meaningfully with a change in broader interest rates, though? Is there a lender that decides to stop making payday loans and buy T-bills instead?
- naniwaduni 3y agoBecause parity of expected returns is achieved roughly when interest rates remain roughly proportional along the risk curve, and of course subprime loans are particularly sensitive to repayment risk as rates go up, it's absolutely possible to get priced out of payday loans. At the level of individual lenders, this looks more like all institutions shifting slightly toward lower-risk lending across the board than any individual lender choosing to buy t-bills instead of making payday loans. But then again, that's exactly what "maintaining higher capitalized operating reserves" means.