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The Refinancing Won't Stop at World Acceptance

Adam Rust's picture

Posted September 7, 2015

The next chart shows the origin of loans held by World Acceptance on its balance sheet.

World Acceptance Loan Portfolio

That's right: more than three-quarters of the loans currently on World's books came from a refinancing. 

World Acceptance does not disclose loans by volume. The only way to get a sense of their activities is to look at their receivables. Their portfolio has been growing, most likely because they have been opening more stores, and it is currently approaching $1 billion. But it is hard to take their receivables at face value. The company sets aside money to cover expected losses. But you can hide losses by offering a delinquent borrower a chance to refinance. 

Who can refinance? The answer is just about anyone. Who would want to refinance? Well, given that a refinance gives the borrower the right to not make a payment during the month of the new transaction, many of those individuals may be people who are in trouble with their debt. Why would they want to refinance? Well, again, that question only raises more questions. To better understand why I would say that, consider that World books its loans using the Rule of 78ths. Anyone who refinances is making a significant mistake because it is only at the end of the loan where a person begins to make considerable progress against their outstanding principal obligation. The Rule of 78ths works like a constant amortization loan (the standard 30-year mortgage is also a CAM) in the sense that early payments pay more interest than do those at the end. But unlike a CAM, the principal repayments are pushed further back. If you refinance, you walk away from the chance to catch up and begin a new round of payments. To make it even worse, the borrower has returned to the beginning of a payment schedule; subsequent payments do less to reduce the debt obligation.  

World Acceptance notes that even though most of its loans are made for terms of more than twelve months, the average duration of one of their loans is only nine months.