Spirit Airlines went bankrupt competing on price. The same thing is happening in private lending right now.

WHAT SPIRIT AIRLINES' COLLAPSE TEACHES ABOUT THE RACE TO THE BOTTOM IN PRIVATE LENDING

Spirit Airlines just filed for bankruptcy.

Their business model was simple. Be the absolute cheapest option. Strip out everything: legroom, overhead bins, free carry-ons, customer service. Compete purely on price.

It worked for a while. Until it didn't.

The same race to the bottom is happening in private lending right now. And it is going to end the same way.

1. What Killed Spirit

Spirit's model rested on four assumptions, and every one of them was wrong.

Price-sensitive customers are loyal. They are not. The moment Delta or United ran a sale, Spirit's customers left. No one flies Spirit because they love Spirit. They fly Spirit because it is $47 instead of $89.

You can cut costs forever. You cannot. Eventually you hit a floor: fuel costs, labor, aircraft leases, maintenance. Spirit squeezed every dollar out and still could not turn a profit when conditions shifted.

Competitors will not undercut you. They did. Frontier, Allegiant, even Southwest started competing on price. Spirit's only advantage disappeared when everyone else joined the race.

Volume makes up for thin margins. It does not. Spirit needed 90% load factors to break even. One bad quarter, one recession, one travel slowdown meant bankruptcy.

The model only worked in perfect conditions. Perfect economy. Perfect demand. Perfect fuel prices. Perfect competition. Real life is not perfect.

2. The Same Dynamic Is Happening in Private Lending Right Now

I am watching lenders chase volume at all costs.

9% plus 0 points when market rate is 12% plus 1 point. 80 to 85% loan to value when conservative is 70%. No fees, no reserves, instant approvals. Lending in 15 states they have never operated in.

Why? Because they raised a $50M fund and have 18 months to deploy it or they lose their management fees. So they compete on price. Race to the bottom. Be the cheapest, fastest, easiest option.

Here is what happens next.

3. The Private Lending Death Spiral

Phase one: attract price-shopping borrowers. The lender advertises 9% hard money loans, no points, fast approvals. Who responds? Borrowers shopping for the cheapest rate. Not the best borrowers. Adverse selection kicks in immediately. Deal flow is up but the quality of that deal flow is the worst in the market.

Phase two: margins evaporate. 9% interest plus 0 points on a $400K loan over an 8-month hold. When your cost of capital is 6 to 8%, the spread left is almost nothing. There is no room for error.

Phase three: defaults spike. You attracted price shoppers and loosened underwriting to chase volume. Borrowers who got declined elsewhere. Operators with thin reserves, weak track records, overleveraged positions. When the market softens even slightly, projects do not sell as fast, carrying costs eat reserves, and they stop paying. Default rates hit 8 to 12% versus 1 to 3% for disciplined lenders. Now you are not making 4%. You are losing money.

Phase four: death spiral. The lender panics and needs to deploy capital faster to hit fund metrics. So they lower rates further, loosen underwriting to 85 to 90% LTV, and expand into markets they do not know. Defaults spike further. Margins collapse further. Investors pull capital. Fund closes.

Same as Spirit.

4. The Lenders Who Survive

Spirit failed. Delta did not.

Delta does not compete on price. They compete on network, reliability, loyalty programs, and premium cabins. They charge more than Spirit. And they make billions in profit.

The same dynamic exists in private lending. The lenders who survive compete on speed, relationships, local expertise, certainty, and selectivity. Not price.

Speed. 24 to 48 hour decisions. 7 to 10 day closings. 24-hour draw releases. Price shoppers wait 30 days for the cheapest rate and lose the deal. Experienced operators pay a premium for speed and win deals.

Relationships. Deal one leads to deal five leads to deal ten over ten years. Proven operators earn higher LTV, creative structures, faster approvals. That loyalty is worth more than 2 points.

Local expertise. We know Phoenix. We know neighborhoods, contractors, and market cycles. National lenders use out-of-state appraisers and algorithms. We use judgment.

Certainty. Terms do not change. Capital does not get pulled. What we commit to on day one is what happens at closing. Fund-based lenders change terms when their committee gets nervous.

Selectivity. We say no often. 70% LT-ARV maximum. The 4 C's framework. First position only. If your deal gets approved, the underwriting was real.

We charge 12% plus 1 point. That is more than the 9% lenders. Our default rate is 1 in 70 plus loans. Our borrowers do not leave for cheaper money because they are not price shopping. They are buying speed, relationships, and certainty.

5. Five Lessons from Spirit's Collapse

Being the cheapest is not a moat. Someone will always undercut you. When they do, you have nothing left.

Price-sensitive customers are disloyal. Borrowers who choose you for price will leave you for price. Build loyalty around something else.

Thin margins require perfect execution. Spirit needed 90% load factors. Private lenders at 9% need 0% defaults. Neither is realistic.

Volume does not fix bad unit economics. Losing money per loan and doing 1,000 loans means losing more money. Volume magnifies the problem, it does not solve it.

The race to the bottom ends in bankruptcy. Always. Spirit proved it. Dozens of private lenders will prove it over the next two to three years.

What We Are Doing Instead

We are not racing to the bottom. We are building upward.

12% plus 1 point. 70% LT-ARV. Phoenix only. Judgment-based underwriting on every single loan.

We are not the cheapest. We are the best option for experienced operators who value speed, relationships, and certainty.

When the 9% lenders go out of business, and they will, we will still be here.

Just like Delta survived Spirit.

If any of this connects to how you are thinking about private credit or capital allocation right now, reply to this email. Happy to talk through it.

Devon