FFS the bank makes a profit in every example provided. I don’t want to say that you obviously didn’t read the post, but I honestly can’t see any way you would come to post this comment otherwise.
Loans are a service. Loans with gentle defaults are a more desirable service. Those seeking loans would often purchase such services preferentially and at a profitable premium to the bank, if they were available or if asking for them were socially acceptable. Laws should be passed to encourage banks make such offers.
Consider the usual death spiral: the “gentle default” (GD) loans are more expensive than “normal” loans. This activates the self-selection bias—people with good credit will take “normal” loans and people which expect that their probability of default is high will take the GD loans. This makes the population of GD borrowers skewed towards high default rates. To compensate for this, the bank raises the rates on GD loans. This, in turn, reinforces the self-selection and the GD borrowers population becomes even more skewed towards high default. Rinse & repeat, crash & burn.
Besides, if you insist that this service would be profitable for the banks, why are they not offering it? The social conventions which prevent individuals from asking for these terms do not apply to banks—if this idea were good, they would take the initiative and create such a product.
FFS the bank makes a profit in every example provided.
Because you have chosen imaginary numbers to produce that result. But however the loan is structured, the bank must get its return or it will decline the business.
As Lumifer pointed out, you are proposing an insurance scheme against default. This is an existing structure, perhaps too much so. In the UK it is called Payment Protection Insurance. The problem with PPI is that it was sold under pressure to people who did not need it. The fallout from that has cost some banks billions, or rather, it has forced them to give back billions they should never have received. to the extent that a whole secondary form of dodgy business has sprung up to assist people in making claims for having been mis-sold these policies.
FFS the bank makes a profit in every example provided. I don’t want to say that you obviously didn’t read the post, but I honestly can’t see any way you would come to post this comment otherwise.
Loans are a service. Loans with gentle defaults are a more desirable service. Those seeking loans would often purchase such services preferentially and at a profitable premium to the bank, if they were available or if asking for them were socially acceptable. Laws should be passed to encourage banks make such offers.
I don’t see why this would be so.
Consider the usual death spiral: the “gentle default” (GD) loans are more expensive than “normal” loans. This activates the self-selection bias—people with good credit will take “normal” loans and people which expect that their probability of default is high will take the GD loans. This makes the population of GD borrowers skewed towards high default rates. To compensate for this, the bank raises the rates on GD loans. This, in turn, reinforces the self-selection and the GD borrowers population becomes even more skewed towards high default. Rinse & repeat, crash & burn.
Besides, if you insist that this service would be profitable for the banks, why are they not offering it? The social conventions which prevent individuals from asking for these terms do not apply to banks—if this idea were good, they would take the initiative and create such a product.
Because you have chosen imaginary numbers to produce that result. But however the loan is structured, the bank must get its return or it will decline the business.
As Lumifer pointed out, you are proposing an insurance scheme against default. This is an existing structure, perhaps too much so. In the UK it is called Payment Protection Insurance. The problem with PPI is that it was sold under pressure to people who did not need it. The fallout from that has cost some banks billions, or rather, it has forced them to give back billions they should never have received. to the extent that a whole secondary form of dodgy business has sprung up to assist people in making claims for having been mis-sold these policies.