Why would this storied investment firm want to be in the business of making small-dollar loans to cash-strapped consumers? It's not like this space is without competition -- just google "unsecured personal loans" and dozens of sites pop up, from traditional banks like Wells Fargo (WFC) to new peer-to-peer lenders like Prosper.com and LendingClub.com (LC).
Goldman, being Goldman, figures it can do this better than the other guys and it may be right. Federal Reserve figures show there's about $890 billion in revolving credit as of March, so it's potentially a decent-sized business.
None of this is official yet as Goldman declined further comment beyond sharing a May internal memo announcing the hiring of someone to run the initiative, which it described as "digitally led banking services to consumers and small businesses." So don't expect to see a GS storefront sandwiched between a pet supply store and a hair salon on Main Street.
Going digital allows Goldman to scale it to the size it needs to make it worthwhile and target likely customers via analytics and data mining. And don't be surprised to see Goldman initially offer very low teaser rates in an effort to grab market share.
If this business takes off, Goldman may ultimately repackage these loans and sell them to the public. If that happens, they are likely to be pitched to retail investors as a way to get higher returns in this current yield-starved environment. Older Americans have been gravitating to riskier investments in order to fund their retirements during these last few years of low interest rates.
What likely won't get stressed is that these repackaged loans would be unsecured, meaning there's no pledged collateral or assets to back them up. So if borrowers stop paying, there's little recourse except taking them to court. (It would be a fun TV reality show to see Goldman bankers in suits fan out across the country as debt collectors.) And while peer-to-peer lenders like Prosper and LendingClub say their default rates are low due to their vetting of borrowers' ability to repay, do you want to be in the collections business?
Once interest rates start to rise, investors will dump this stuff in favor of more secure options like U.S. debt or highly rated corporates. That will likely push rates on these loans even higher in an effort to attract investors to take on the added risk, further straining borrowers, folks who don't need any more financial hardship.
You'll recall securitizing loans was tried with residential mortgages in the years leading up to the financial crisis and that didn't end so well. And who's to say other big financial institutions, sniffing profits, won't also jump in with each firm pushing riskier bundles in an effort to sell them?
Retail customers should avoid taking out unsecured personal loans. Treat them as a last resort. Slash your ongoing expenses instead, renegotiate existing debt or hit up any flush relatives for cash. Unsecured personal loans have a way of exacerbating borrowers' cycle of debt with their higher interest rates, capped loan amounts and short repayment periods.
If you suffer another financial setback with this loan outstanding, that just adds to the pile. If you absolutely have to have quick cash, a better option (although there is downside) might be borrowing from your 401(k). At least in that case, you are repaying the loan to yourself.