A Rising Bubble: An Assessment of The Personal Loan Industry

Abstract

The 2008 Financial Crisis set the entire world into an economic slump, illiquid companies were forced to go under, leaving many without jobs. Quantitative Easing was deployed in the 4th quarter of 2008 in an effort to save a failing industry. While delevering the financial institutions, it incited a sudden expansion of consumer debt recording a $1.2 trillion rise by 2019. This study engages with personal loan data from 2007-2019 with the goal of evaluating a potential bubble within the sphere. The framework employed throughout the study focuses on the possible existence of either a rationally and asymmetrically made bubble, leaving less room for error. Evidence reveals that the credit spread charged by this company substantially exceeds the risk premium assumed, giving way for the addition of a bubble factor. Further findings confirm economic commonalities amongst individuals that are indicative of a bubble. The study found that debts of individuals have been rising significantly more than their incomes. The repayment rate and average FICO score of borrowers have plummeted to below 2008 levels making the company riskier than ever before. The study then attempts to interpret the implications of these findings, projecting another financial recession.