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But loans for these activities (such as a loanshark) have their own set of risks that have to be factored in and affect the interest rate: - You may have no le
by nemild 9y ago
But loans for these activities (such as a loanshark) have their own set of risks that have to be factored in and affect the interest rate:
- You may have no legal recourse and no collateral to seize
- The loan may be funding risky or illegal activity with a high likelihood of failure, which demands a higher interest rate
- There may be no competition that drives the price down
Ceteris paribus, increasing the cost of non-payment should reduce interest rates. If you relax the "ceteris paribus", then all bets are off.
Another way to see this is this question: if the lender had to forsake the threat of violence, would the loan price go up or down?
- justin66 9y agoIntroducing the threat of violence isn't smoothly adjusting a variable in a formula. It's introducing a gating factor that's going to keep not-desperate people from dealing with you.
- nemild 9y agoI'm happy to discuss with you offline (see my profile). The point I'm trying to make is that increasing the ability for greater enforcement mechanisms, should — on average — reduce the cost of loans. As I point out, there are real debates about where to draw the line about what is appropriate lender enforcement that I've personally struggled with. I apologize that my example isn't perfect, and you're absolutely right, there is selection bias, unless there is little recourse for other products.