I'm probably going to go to downvote hell for this, but I need to say it; I'm massively disappointed startups are still using their energy and talents to service the loan industry. It's 2011 - have we learnt nothing from the past 3 years? Build value, don't destroy it.
Selecting qualified people for loans is a valid industry that promotes growth. The goal is to loan the right amount and that the person will pay it back. If you can do that accurately and loan to people who would fail normal tests then you've created significant value.
What if the person in receipt of the loan was selected with perfect accuracy but then his/her circumstances changed due to no fault of their own?
No loan is a "good" loan. Loans facilitate the reallocation of money. No net value is created and for the majority "value" decreases in fact.
I'd challenge the "leads to growth" assumption too but I'm on iPhone and I don't wish to hijack the thread. Essentially, it does not lead to sustainable growth for the majority (or the economy for that matter)
A loan is a transfer of risk, and a way to engage in growth faster than otherwise possible. Without loans (or investments, which are similar but involve a greater transfer of risk), any new venture would need to first save enough money to a) carry out the venture and b) survive if the venture fails. With a loan, the bank gives the capital right away, and assumes some of the risk - but takes a percentage if the venture succeeds.
Now, this does create value if done properly. Because the new venture (whether it be a new business, expansion of an existing one, or whatever) happens _right now_ instead of 10 years later, there's significant savings in opportunity cost. The bank simply pockets part of this savings in exchange for its assuming the risk of losing some or all of the money it lent.
It's only when the process screws up, and the bank misjudges the risk - or when the borrower misjudges how much they can repay without undue hardship, that problems occur. These are not failings in the idealized form of the moneylending system, but rather imperfect information (the former) or human shortsightedness (the latter).
Producing value is an activated process[1]. Without money, the investment needed to produce value can't be made, and the value that would have been produced over the lifetime of the product or service is lost to society.
The entire point of a loan is to reallocate money to people who need it temporarily. Without loans, only the rich could start businesses. This is especially relevant outside of the software sector, where the costs of things like factory tooling cost significant amounts of money.
There are lots of loans that shouldn't be issued due to no fault on the person being invested in.
For instance, I've been working on opening an icecream shop for weeks and need a loan to finish the preparations and a bigger better icecream shop opens next door. Through no fault of my own, I am no longer a good investment.
It is your fault if the bigger better icecream shop opens next door and you still persevere with your original plan. That suggests that you personally are a bad investment (not just your original business plan.)
I would be more likely to give you the money if you needed five times as much, because you had decided to sell pies or pizzas instead.
I Agree with dan. another way to look at loans is like funding for your startup. Just like the credit score, vcs give you a score on how likely it is that you will yield a return. There is not anything wrong with that. This is a fundamental part of any economy. Investment for people who can use it to create value.
2008n just showed what happens if you don't access the score correctly.
The economy isn't controlled by one or two startups who luck out - its controlled by the spending power of the average person on the street. If they can spend, everyone benefits. Loans help them spend, but the consequences of taking on loans they cannot long-term (due to ignorance, bad loan selling or change of circumstances) afford to service means they stop spending. And where they stop spending, us entrepreneurs run out of money. Loans are the antithesis of value creation, as I added in my other comment.
Same applies to small businesses and even tech startups. Just think what'd happen to our industry if angels started exercising the "debt" part of "convertible debt". Lucky angels are so nice ;)
I'm going to have to disagree. When depositors decide to save and defer consumption, entrepreneurs notice this (due to interest rate decreases) and can invest it to increase production. In general when the savings rate goes up, interest rates go down, and we see a shift from consumer goods to capital goods.
Taking out loans to go on vacation, etc is not a good use of the money and will hurt someone.
Taking a loan to invest in a business, fix a leak, etc will create value either by creating new opportunities or preventing catastrophic failure (e.g. a stitch in time saves nine). This is why pay day loans aren't evil, if for some reason you had an unexpected cost and won't be able to make a mortgage payment or truck payment the penalties could be quite severe, and thus a small loan to get over that bump is a fiscally rational choice - unfortunately many people borrow too much or too often and don't have a plan to live within their means.
