Over the last 15 years, Americans have become accustomed to large amounts of unsecured credit through home equity lines of credit, installment loans and credit cards. Believe it or not; to some degree, this does make America the superpower the way it is. Americans are known for spending, spending more than they can afford. It’s a no brainer that spending stimulates the economy. However, with banks facing unprecedented losses in unsecured lines of credit and at the same time government tightening regulation on how much fees can be charged on these loans, industry experts are speculating that these lavish times may not last for very long. Now let’s think about what it means to consumers. From a borrowers point of view lending would be limited to two basic products:
Collateral Lending Against The Assets
This has been a common norm for a very long time. We would soon move back to an age when the collateral amount would always be greater than the amount you end up paying. For example, if you need to a credit card for 5000$, you either put a deposit down or corroborate property that valuates higher than the credit line. That will be the only way consumers will be able to enjoy the benefits of the card.
Short-Term Loans with Re-Pricing Clause
The recent regulations have made it difficult for banks to change the terms of consumers who have shown bad behavior on open ended loans. For good people to get loans at good terms, banks have to re-price for risk. Hence, we might see a slew of new unsecured lines of credit which are close ended and the banks have the ability to re-price the consumer if he shows a negative behavior.
What does it all mean to an investor? Well, you might want to hold your breath and watch before you invest in any credit card companies. If you are an active trader and are open to taking some risks, this might be a good time to invest in credit card companies. Because believe it or not, these companies are going to come up with a plan B to keep the business they have enjoyed so far.
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