from Patrick McKenzie | by Patrick McKenzie

One of the most common questions I’ve gotten since writing about bond math, which I thought I already answered, is whether it affects loans as well. Yes, it does. A fixed interest loan decreases in value if interest rates rise. It is not worth the balance (and wasn’t on day 1).

I think that might conceivably be News You Can Use for borrowers and imagine people have complicated thoughts on that.

“How would I use it?” Call the bank and offer to buy the loan back. “Big deal everyone knows you can repay loans earlier.” Yeah that was not the suggestion I just made though.

“Spell that out for me.” I mean if a bank did you a favor in 2021 and wrote a loan at 2.5% with a duration of 5-10 years you could do them a favor and offer them to buy the loan back at, oh, 90 cents on the dollar of your outstanding balance.

“That’s risible.” I mean, the person you talk to might be surprised by the offer, but *not paying your loan as agreed* would be morally interesting. Making an offer to renegotiate a contract is Tuesday.

And then there exist some fun institutional details like “How do you communicate internally that one should be open to this in loan servicing, including pricing it appropriately?”, “Is this still a good idea if people can learn it is a transaction you offer? Confidence, etc”, …

… “While you presumably think early repayment option has de minimis impact on credit quality of seasoned portfolios would you still think that if you offered this transaction given that most sophisticated/best borrowers might take it preferentially?”, etc.

“Do banks ever let retail users renegotiate loans?!?” All the time, most commonly because credit quality is impaired and they’d suddenly prefer getting X immediately to having a claim on Y eventually where expected value of collection is very dubious.

Back in my days of helping people through banking troubles N years ago sometimes the problem was that, for whatever reason, they had far less ability to pay than they actually owed, and would ask whether banks would accept partial payment and then a plan.

I would frequently tell them “It’s commendable that you want to repay the bank, and they very well might be willing to negotiate here. So why don’t you ask whether they would accept, say, 40 cents delivered immediately ‘in full satisfaction’ of the outstanding debt?”

There is a flowchart at the bank for distressed consumer debt, and by this stage in the game, that person’s debt was frequently sitting in a CSV waiting to be sold to a debt collector for 3-20 cents, and so surprise recovery is obviously incentive compatible.

“How did you feel about that?” Clearly obtaining a debt with intent to not repay it would be dishonorable, but mostly this was just life happening between opening credit cards and the present day. If bank willing to negotiate, I support their moral right to freedom of contract.