During a recession, an AI-based lending company like ENVA may struggle for several reasons.
First, during a recession, there is typically a decline in economic activity and a rise in unemployment. This can lead to an increase in default rates, as borrowers may struggle to make loan payments if they lose their jobs or experience a reduction in income. If ENVA is relying on historical data to make lending decisions, it may not adequately account for the increased risk of default during a recession, leading to higher losses for the company.
Second, credit may become tighter during a recession as banks and other financial institutions become more cautious about lending. This can lead to a decline in the demand for loans, which could affect the volume of business for ENVA.
Third, a recession can lead to a decline in asset values, such as real estate and stocks. If ENVA is using these assets as collateral for loans, it may face losses if the value of the collateral declines.
Finally, it is worth noting that other companies in the same space as ENVA may also be struggling. If other AI-based lending companies have seen their stock prices decline by 50% or more over the past 12 months, it is possible that ENVA may also be facing similar challenges.
Overall, a recession can present significant challenges for an AI-based lending company like ENVA, as it may not be able to effectively assess risk and manage its portfolio in a challenging economic environment. It is important for any lending company, including those using AI, to have robust risk management practices in place to navigate economic downturns and protect against losses.
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