Friday, March 14, 2008

Personal Subprime Lending-- as much drama as a bad relationship

Personal Subprime Lending

Let me describe a case where I was in a position to make a personal high risk subprime loan. The conflict was resolved at 5:26 AM Friday March 14th.

Event. A house mate I have seen before but never really talked to asks for money for a flight booking confirmation. He explains that his bank account is frozen. (He later said it was due to him not paying his phone bills. Red flag.) He says his parents can't send him the money and he needs the money desperately to confirm his flight booking back home for break. He offered me 50 pounds in return for the loan of 150 pounds. He needs it today and will leave tomorrow. 

Analysis. A reasonable person would find this situation very high risk. I initially told him I don't have that much money and chose not to get involved as lending books can be risky let alone money.

Event. He comes back and says he will borrow whatever I can lend him. Even 20 pounds. He'll pay me back ten pounds more or something... I tell him I will withdraw whatever I can from my bank account and contact him if I want to lend to him.

Analysis. I still find the situation fishy but intriguing. I want give myself the option to participate in this investment opportunity. I think I have mitigated risk. I decided I will require a collateral equal to the amount I am lending.  I have done decent background investigation: I asked if other housemates if they were asked. I asked him why his parents don't just do it for him online. He said his mom doesn't know how and his dad is unreachable. I asked him how he would pay the booking as he is asking for cash instead of card payment. He said he can get a friend to do it... Also what the hell is a booking confirmation fee? Don't you pay everything already when you book online? I never had to pay anything after buying the ticket. I have never heard of what he was referring to. 

Event. I go to the bank and withdraw all the money I have in my current account, 30 pounds. All other money is in my interest generating savings and can be transferred at any time. I meet my friend for dinner and he says he wouldn't do it. He believes this guy will flee and just wants money. I said he seemed really desperate. If he just wanted money, he wouldn't seem so desperate. I am a good judge of people 75% of the time and believe in my abilities but I am not foolish enough to lend money with no collateral. 

Analysis. This is the first time I would be lending money to a non-friend. Even with friends, I never lent more than $20. And I usually don't even care whether I get the money back. 
This situation is strange because 1) its very fishy or lots of coincidences happened, 2) is the objective to do a favor or make a smart return?, 3) who am I? Am I greedy, open-minded, or reasonable? Selfless to strangers, or simply gullible?

Event. Next morning he finds me in the computer room prepping for an interview. (I couldn't find "Rockstar" so I got a "Relentless" which is also bottled by Coca Cola so I bought it). I tell him I have 20 pounds. He promises to pay me 35 pounds in two weeks. I ask for collateral such as cell phone or laptop. He goes into his room and returns later with his ID card from his government. I look and think it is legitimate, and after being reassured by his roommate that he would pay me if his friend didn't, I agree. I feel like I have minimized risk to an acceptable degree: I am only investing 20 pounds (just like blackjack, but more interesting). We wrote and signed a contract with details of the loan including amounts, dates, parties, contact details such as room number and phone number. I had someone else's guarantee. I have his government ID card. I am still a little uncomfortable because I don't have anything sellable for collateral. Just a souvenir of my stupidity if he doesn't come back. We settle a loan of 20 pounds to be paid back in 2 weeks with a 20 pound interest payment. 

Analysis. After drinking a energy drink for my interview, not eating much (I was out of food and money), and jogging right before bedtime. And having to wake up at 5AM for my work, and my roommate walking in and out all night and receiving texts, it was not surprising I couldn't sleep no matter what I tried (exclude earplugs as I didn't want to risk not waking up). This sleeplessness made my mind have uncontrollable, scary thoughts. The feeling was like being in a bad/exciting relationship. You never knew what to expect. A mixture of anticipation, uneasiness, unpredictability, excitement, and emotional overdrive. I realized how I had no actual valuable collateral. I thought of my friend who lent $20 to a random person on the street in Toronto and never got it back. (But he was also the friend that had his laptop stolen while he was taking a nap at school.) I tried to soothe myself with reasons such as how it was only 20 pounds. I had lost more daily on the stock market these days. And it wasn't just about money, but out of interest and intrigue. Then the counter arguments began: how my mom would be so mad that I did that, how my step dad lost $10,000 by lending to a guy, how I didn't have anything of value to me. And then I had a Momento moment. If he is traveling how could he not need his government ID? It must be a fake. Then I started poking many holes in his story. Why is he so flexible with how much he needs to borrow? Why does he give such high returns? I thought he said he was leaving today? Now he tells me he is leaving at 9AM tomorrow? I fall asleep finally for a few minutes and am torn between letting it play out or asking for more collateral. I get up at 5AM.

Event. 5AM. Knock on his door. No answer. Again. No answer. I push. It opens. I see his room mate awake on a laptop. He is asleep. I wake him up. I am relieved to see his stuff is all packed. I tell him I need something valuable. He says he doesn't have anything. Among the things on his night table are two cell phones, a headset, a bible, and a wallet. His roommate reassures me he will pay if his friend doesn't. I feel like I need this on my terms and I need a collateral. He says he simply doesn't have anything. He still has 15 pounds in his wallet. I am puzzled. I thought he needed the money for booking... I thought he needed it to leave? This was one of my previous unpleasant lingering thoughts. His story was definitely fishy. 

I ask him what the remaining money was for? I ask if it is for getting to the airport. Obviously he was going. There was no question. Suddenly, he says, he'll return my money. I ask him if he is sure. "I thought you needed it to go?" 

"I do. But you want something of value and I don't have anything. So I can't borrow your money, so I can't go." I feel he hasn't been completely honest with me. And all I cared about was 1. Not losing money 2. Making sure I could help him go home. Since it seemed like I could get my money back (not lose money) and he was going home (as he had the money I gave him in his wallet and he must have confirmed his booking by now). My objectives were fulfilled. I definitely didn't care too much about the 20 pounds he would pay me. I could earn that in a few hours. Also I didn't like to think I was profiting from other people's misfortunes. I only wanted to be compensated for risk. He gave me the 15 pounds in his wallet and his roommate covered the additional 5 pounds.

I don't feel like I made a right or wrong decision. I made one that I am happy with. It was like getting out a wonderfully exciting, bad relationship. 

End note: After writing the above, I go to his room. No answer. I find him and his roommate with two others in the common room. He didn't leave. It makes no sense. He must of got enough money to confirm his booking without my twenty. He must of done it before his 9AM flight. He wouldn't forfeit his booking if he was short 15 pounds only. Anyone would choose their flight over 2 weeks without their cell phone. I ask him about his trip and he doesn't really talk to me. I am glad with my choice. I am no fool. Oh one more detail I forgot to mention until I went to his room again. Under his name on the door, "is a f---ing dick" is written in pen. 

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