Your phone is probably a CDO

I'm not sure how many people know this, but I thought I'd share something I learned a few years ago when I worked for a mobile phone seller.

Most modern smartphones are too expensive for people to purchase outright. At the most extreme end, the iPhone 14 Pro Max costs £1,200⁰. So a typical customer elects to pay £50 per month for 24 months.

The customer gets a new phone for a reasonable monthly figure. The phone seller gets a regular monthly payment which helps with their financial forecasting and cashflow.

But the seller has a problem. They have, effectively, loaned over a grand to the customer. And they've secured it against a rapidly depreciating asset which is easily stolen or broken. Most sellers don't offer different loan rates to different people. For a traditional loan, someone with poor credit might pay a higher %age than someone with a better credit rating. But, most sellers just give you a straight approve / deny for their loan¹.

This is where the Collateralised Debt Obligation comes in. You may remember CDOs from the Great Financial Crisis. They're fairly simple to understand. I am a high risk borrower and you are a low risk borrower - mix our loans together and you've got a medium risk debt.

Repeat that over thousands of phone loans. The seller has a pool of mixed risk loans which they can sell in bulk.

Here's a toy example - these figures are plucked out of thin air for illustrative purposes.

• Buy 1,000 phones wholesale for £800 each.
• Loan each customer £1,200 over 24 months to purchase the phone.
• Sell the £1,200,000 debt for £900,000.
• Immediate profit of £100,000.
• Every month, send the £50 from each customer to the group which now owns the debt.
• If fewer than 25% of the customers are bad debtors, the debt-owner still makes a profit.

Of course, it's a lot more complicated than that. And the margins are much slimmer. And there are various insurances, costs of chasing debt, ability to cut off service, etc. But hopefully you get the idea.

What does this mean for you?

If you've got a good credit rating, you're probably better off taking a personal loan to buy the expensive phone you lust over.

If you've got a bad credit rating, you're probably paying a lower rate than you would from a personal loan. But you might be better off saving up or buying a cheaper device.

Will this all come crashing down like the mortgage CDOs of yesteryear? Probably not. Phones are a lot cheaper than houses. For now...