Market Discussions

Recently most of the uncollateralized loan threads were probably scams. There's been at least one person, perhaps several who have created multiple loan request threads with as many alts, some of them near identical to their previous attempts, within the last few weeks.

One person posted about their successes on the Crime & Punishment sub-forum, which led to even more lazy loan request copycats. It's pretty much identical to what you see in Jita, if someone managed to pull off a scam, or creates a slightly different variation on an existing scam, then everyone else who isn't AFK copies them and usually few to none succeed afterwards.

They appeared to be willing to give their API keys out, so I requested them, which led to accusations that my only goal was to out them as scammers and you shouldn't give your API key to me. That's pretty funny, huh? I guess they were right though, because I won't be touching any of these lazy proposals based on their posts.

I wanted to discuss this in my 4b loan request joke thread, after I had done a tally of the loans in the past couple of weeks, but I've been too lazy.

Yes, there have been quite a few scam attempts, but there are some genuine uncollateralized loans, as well. Like mine! :D Well, you can't know it is legit until it completes this weekend, but my investors will end up with a very real 130 million ISK in profits from this month.

I did get a few raised eyebrows jumping from 200M to 1B, and I received several API requests. I only gave my API to one person, though, as the other requests were from alts (which makes me paranoid in giving even limited api).

You are right about one thing: uncollateralized loans are much riskier than secured loans, just like in the real world.

With no collateral, the debtor has less incentive to keep their end of the deal. Credit card debts default the most often, followed by car loans, and lastly by mortgages. People filing bankruptcy could care less about paying their credit cards. Some people let their cars get repossessed if they have other options. But rarely will you see someone purposefully default on their mortgage, which keeps a roof over their (and their family's) head.

The savvy investor whose goal is to make a profit over time through interest will need to be good at two things:
1) determining how likely a potential debtor is to pay back the loan,
2) calculating a system where they will profit overall in spite of some inevitable amount of defaults.

IRL corporations have entire algorithm libraries to help them with these tasks. The reason people with bad credit get worse interest rates is directly related to a corporation's long-term risk management strategies.

If you want to be profitable in the long run, you better have a plan on how to deal with these challenges. Otherwise, save yourself some ISK and stick to collateralized loans. However, you will be missing out on a lot of potential profit.

One tip from the real world for investors looking to profit from their abundant capital: always go for business loans over needs-based loans. A capsuleer wanting to borrow capital to fund a sound business venture is a much better debtor than some space bum who lost their PLEX money gambling and "just needs some help."

I've never understood how if a loan is fully collateralized, it needs to be filled in the first place. Couldn't you just use your collateral in place of receiving the loan?

Thanks, it is my, uh.. pleasure, heh. :3

You make an interesting observation about trends in interest rates. They are certainly dynamic, but there is an equilibrium that is naturally established by market forces.

You could imagine uncollateralized and secured loans as two distinct products, each with it's own price (interest rate) and volume history (quantity of ISK lent out). Each type of loan has a different value to different parties.

Secured loans are more valuable to the lender because of decreased risk of default, but less valuable to the debtor due to the burden of owning and offering up the collateral.

Unsecured loans are more valuable to debtors because it is much easier to accept one, but less valuable to lenders because of the increased risk.

Unsecured loans should always maintain a higher price, or interest rate, because they are demanded more often and are more difficult for lenders to supply due to higher risk.

Secured loans are more valuable to lenders (due to lower risk), but are demanded less often because of the added difficulty to provide the collateral.

These truths are what lead to the price difference, always granting unsecured loans a higher interest rate, because the interest represents both the reward to the lender and the cost to the debtor.

Most of this is common sense, but things get more interesting when you take the actions of the community (the market) into account. Say there was a flood of investors with spare ISK on MD, and loans of both types were being filled left and right. You might run into a situation when the supply of available loans (requests for loans, that is) becomes more scarce and there are more funds available than loans requested.

At that point, debtors could start asking for lower interest rates and still get their loans filled. After all, if the lower rates are the best investors can get, they will still fill the loans so they can yield some amount of return on their capital. That is, until the rates get so low that investors are better off doing something else with their money, like trading with it.

Of course, if investors start to divert their ISK away from filling loans, the supply of ISK starts to decrease, leading to loans going unfilled, leading to debtors increasing interest rates to attract lenders back. Interest rates will never drop lower than a rate that is less lucrative than the next best thing investors could be doing with their money. And so equilibrium is maintained always.

As far as "abuse" goes, it is true that more defaults can affect average rates. However, the market is not emotional the way that we as humans are. It cares more about probability and statistics. With enough information, you could devise a formula to work out how to profit even with the occurrence of defaults.

Break-even point:

i * P * (1-d) >= P * d

where

i = Interest rate
P = Capital lent
d = Probability of an uncollateralized loan defaulting

If you knew how many unsecured loans were given out over the past 5 years of EVE and how many defaulted, you can calculate the probability of default and solve this equation for i to tell you how much interest to charge in order to make a profit, even with defaults taken into account.

As long as you are charging enough interest on successful loans to make a profit and subtracting ISK lost to defaults, you still make money. Losing money to fraud or default is a part of doing business while lending, so you need to consider it to accurately project your profits.

If the average rate of defaults increase, so must the average interest rates charged, in order for investors to maintain profitability. Of course, an investor can simply ignore this and charge a lower amount, but statistically they will start to lose ISK overall and eventually run out of funds, thus being forced out of the market. No one can permanently stay in a market while operating at a loss, because ISK is a finite resource.

The very same mechanic is true for trading in-game items.

The costs of selling and re-buying the collateral will exceed the interest on the loan.

Example: I own a Kronos with a cheap fit (T1 rigs, T2 modules). I could sell it for perhaps 1b (guessing, not been following prices), then buy it back for 1.15b, or I could mortgage it for a loan of 1b then repay 1.03b.

'Invisible Hand' fantasies do not work in reality, particularly not when talking in games.

The 'invisible hand' is, right now, telling every single L4 mission runner to stop salvaging their missions. Yet lots of people still do it. It is, right now, telling people to stop accepting collateralized courier contracts and do anything at all else with their time. Contracts still get done, even some hilariously bad ones (I've had someone do 16j through lowsec for 16000 ISK).

One person could indeed, given sufficient liquidity, try to control the entire loan market. But it is a very labor intensive way to make ISK. Those individuals with the capital to do it probably have better things to do.

Would 1% interest even be worth logging in for? At that point you're better off buying PLEX. Unless you were doing it for RP reasons, this would probably be a waste of time.



The borrower would be the one considering selling it if they needed the ISK, but they're better off getting a loan on it because it's difficult to sell a rigged ship for the same price you paid for it.

If one really rich player started snapping up every loan request posted and kept doing so, you should see a decrease in interest rates, yes. However, as interest rates decrease, demand for loans will increase. This is actually the theory which the Federal Reserve bank relies upon to stimulate the U.S. economy.

The idea is that as borrowed money becomes cheaper to obtain, people who previously would not have borrowed it now may have an incentive. A simple example would be Trader Bob who has discovered an item with a 5% margin, but he has no spare capital to trade this item. If he can now borrow ISK at 2% interest, he can earn a net profit using the borrowed capital.

The closer you get to 0% interest, the more of these cases you will see. If borrowing ISK were completely free, you would see an explosion in loans. Anyone with any venture making any amount of ISK but requiring currently unpossessed capital now has a reason to borrow.

Back to your scenario. . .

If interest rates get depressed to 1%, and all investors active in the loan market have alternative ventures yielding greater than 1%, then it is possible for that player to obtain the entire 1% interest rate loan market.

But if even one competing investor had no alternative ventures to earn as high as 1%, that investor would likely compete against the monopolizer and potentially contribute to increasing the rates once more.


That's the thing, too. You have to consider opportunity cost at all times. If staying logged out is more valuable to the investor than earning 1% on a loan, that investor may decide to stop offering the loan. At which point, there will be less ISK available for loans at 1%, and interest rates will start to creep higher until they are worthwhile to some investor.

So even the value of staying logged out of the game will have an affect on the supply and demand of the loan market.

Economics is as much about human behavior as it is numbers. Imagine how differently all of this might play out if the actors were robots, who could care less about "things other than EVE."

It is fun stuff to think about.

Oh and Sabriz, if you can prove that there is no such thing as an invisible hand at play in markets, a Nobel Prize is waiting for you. Seriously.. that would be kind of amazing. And if you could prove that virtual economies like EVE are also incapable of self-regulation, you get two!

Collateralised loans are, indeed, risky propositions but it is important to make some distinctions when discussing them. Some of them (certainly the majority recently) are pure junk and not worth more than ten seconds of consideration. These sometimes get filled but they rely on investors who don't have the faintest idea of what they are doing. We can exclude these from the discussion as they are on a level with isk-doubling and shouldn't concern anyone with the slightest intelligence.

Then we have the offers that have some degree of plausibility and which should lead a potential investor to carry out a proper assessment. This market is rather quieter than it used to be and came to an almost complete stop some 12-18 months ago but seems to be picking up steam again. This type of offering is still risky but the risks are at a manageable level. I did some analysis on a year's worth of investment opportunities some years back and found that 90% of opportunities pay back (note that this does not mean 90% of borrowers pay back - It's quite common to see someone pay back their first and second loans and then run with the third, for example).

Now, 90% is actually not a bad starting point. When I did my research I found that if you invested the same amount in every single offering that filled you would break even, with the interest from the successes covering the losses from the failures (note that this only applies if you diversify properly - if you scale your investment size to be proportional to the size of the offering you will be in much more trouble as one big failure can wipe out the proceeds of dozens of small successes). Starting from this point a few simple rules can keep you away from most of the dangers and good investors can consistently get a success to failure rate of 20:1 or better (personally I have never been scammed despite dozens of investments totaling several hundred billion isk which have bought in tens of billions in returns but I strongly believe that the zero default rate is as much a product of luck as judgement - I am due a failure or two).

Another important point to note is that most collateralised loans, i.e. those where the collateral is held by a third party, are really uncollateralised loans. Unless the borrower holds the collateral him or herself the uncollateralised risk does not disappear - it is simply transferred from a risk that the borrower wll scam to a risk that the third-party will scam. A 'true' secured loan completely removes the risk from the transaction by handing the collateral to the lender but most of what goes on here involves risk management rather than risk removal since if the collateral is more valuable than the loan the borrower is just as much at risk of being scammed as is the lender.