Chapter 16: The Hazards of Installment Loans

Federal rates rise, and the interest rates on loans from various banks will also rise. According to Carter's estimation, they shouldn't be lower than thirty-two percent once they rise. So, when borrowers calculate before taking a loan, they realize that with an annual interest rate of over thirty percent, they'll end up paying back twice the money to the bank in less than three years.

Is this terrifying? Absolutely! Consequently, borrowers are hesitant to take loans. But do they still have loan demands? Of course! If they didn't need a loan, would they bother consulting the bank for one?

Suppose, at this moment, one's own Blake Bank emerges and tells them, "Come to us for a loan! Although our interest rates aren't low, you can repay slowly. If you borrow a thousand dollars and repay it in a year, you'll only need to pay back about a hundred dollars each month, which is much less; if you repay it over two years, congratulations, you'll only need to pay about $67 each month! And if it's over three years...

In short, the longer the borrowing period, the less they need to repay each month. And surprisingly, as a lender, one can earn even more this way!

Compared to paying back the principal and interest all at once, with monthly repayments, one receives a cash flow every month, and then one can lend this money out again. This is what leverage is all about!

With a million-dollar principal, cycling it like this for a while, lending out two or three million in loans is quite normal!

"Hey, are you even listening? You're not still fixated on unsecured loans, are you?"

The more Carter thought about it, the more fantastic it seemed. His entranced expression made Goodman glare, his palm, as big as a fan, waved in front of Carter's eyes.

"Uh, no. The issue of unsecured loans is on hold for now. I'll think about it later. But I just thought of another idea. What's the default rate on our loans now?"

"Usually it's only about two percent until the economy started slowing down these past few years. Now it's probably around eight percent."

Goodman eyed Carter suspiciously, fearing he might have some new idea.

"I see. I have a new idea."

Darn! Just when you thought things couldn't get worse!

Goodman's eyes widened, his body trembled with indignation, and he raised his hand, ready to--

"About repayment, let's try installment payments in the future. Instead of requiring a lump sum repayment of principal and interest at maturity, we'll combine the principal and interest, then spread it out over each month, letting them repay monthly. This way, the customers' pressure will be reduced, and our funds will be easier to recover. It should reduce some default rates. Even if it doesn't, it won't lead to situations where all the debts go bad like now."

Carter lit a cigarette while speaking lightly. After finishing, he looked up, only to see Goodman's arm extending, hanging in the air. Curious, he asked:

"Goodman? What are you doing?"

"Huh? Oh, uh... I'm scratching my head, yes, I'm going to scratch my head. I forgot to wash my hair yesterday, it's a bit itchy! Hahaha~"

His outstretched arm naturally returned to his head. At this moment, Goodman did have a bit of an itchy scalp. As a banking professional, he had the financial sensitivity one would expect.

Almost the moment he heard Carter's explanation, Goodman realized the value inherent in this change in repayment method. However, at the same time, he also thought of the problems it might entail.

"Whew~ Carter, I don't know if you're aware, but installment loans have been around for a long time. In the 1800s, the Homestead Act sold public land to farmers, using installment loans. People buying land only needed to pay a 25% down payment, and the remaining 75% was to be paid back in three installments over four years."

Goodman ran his hand through his hair, sighed, then continued:

"Besides the Homestead Act, installment loans were popular in the US over fifty years ago. Especially in the automobile industry, in 1900, there were no cars in the US, but by 1929, over ninety percent of households in the US had cars. Do you really think people had that much money to buy so many cars back then?"

Huh? What?

At this moment, Carter somewhat resembled Fan Xian from "Joy of Life" when he was showing off glass and cement to his father. Regardless of whether it was awkward or not, Carter's inner voice was roaring: Since you guys already had installment payments back then, why are loans paid back in one lump sum now?

"The invention of installment payments stimulated economic growth, but there was a fatal problem. It led to excessive consumption; the money from installment loans essentially borrowed from the future. But people at the time were crazy; they didn't realize this. Let's say I borrow a thousand dollars from you, and I only need to repay a hundred each month, so I still have nine hundred left, and life is still manageable. Then I see something I like and borrow another thousand, so I have eight hundred each month, and life is a bit tight. Then you see where this is going, right?"

"This is the situation for the customers. On the merchants' side, suppose I own a car factory. Originally, I thought there weren't many wealthy people in my area, so it would be good if I could sell thirty cars a month. So I only bought one production line and hired ten workers. But suddenly, three hundred people wave money at me to buy cars. Do you think I'll sell them?"

Of course, I would! For merchants, if someone buys, why wouldn't you sell? Do you find money too hot to handle?

As the conversation unfolded, Carter understood.

Essentially, due to the existence of installment payments, people's consumption capacity was greatly enhanced. Then it was a case of market demand determining market supply; with people wanting more goods, factories had to ramp up production.

Buying more production lines, hiring more workers, offering higher salaries to poach workers, and even borrowing during this expansion process. Eventually, one day, people suddenly realized they had too many loans. After securing basic necessities like food and drink, they had nothing left after repaying loans over the next few years.

So, people stopped borrowing. Without borrowing, there's no consumption. What do factories do then? If they can't sell what they produce, with almost all production lines in an idle state, there's a significant wage bill to be paid. So what do they do?

Layoffs! More layoffs! Layoffs to the bone!

With one link leading to another, more and more people became unemployed. And the more unemployment, the less demand for consumption, leading to more stores closing, ultimately forming a vicious cycle.

And then, in October 1929, the first shot of the complete collapse was fired from the New York Stock Exchange! Bankruptcies, business closures, mass unemployment, even the income of those not unemployed was halved, living standards plummeted, and public order nearly collapsed.

With such a precedent, who would dare to engage in installment payments again? Aren't they afraid of a repeat of 1929?