The best two sentences I read this morning

Charge 80% per year on a loan in the U.S. and you’re called a usurer.  Charge 80% on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

That is Dean Karlan and Jonathan Zinman, in today’s WSJ, "In Defense of Usury," p.A18.  Karlan and Zinman discuss their study showing that micro-credit borrowers in South Africa are better off for receiving the money, even when they pay very high interest rates.


I agree with both the statement and it's seductive wording. BUT I think there is something to be said for
acknowledging the differences that lead to US institutions (in the broadest sense) having access to more
liquidity and access to better technology to assess risk. Insofar as loans at the same rate made abroad
are riskier for lenders, one can argue that they are more charitible.

How about some honesty in phrasing interest rates?

When you get a mortgage, the interest rate is expressed relative to the amount the bank loans you, ignoring
all the fees you have to pay the bank for the privilege. In reality, of course, you are only truly borrowing
money *net* of those bank fees. If the bank loans me $80,000 and I pay it a $1000 processing fee, I really
just borrowed $79,000, and the true interest rate is higher than the one quoted (which looks like I
borrowed $80,000.)

What they call "interest" on these microloans is really just to cover fixed fees, like in the above, that
become significant for such small loans. So if you loan someone $100, and he has to pay $80 in interest
the first year, you could play the same game as on the mortgage: make the interest rate "40%" but require
the borrower to pay an "application fee" of $40 over the course of the year.

Problem solved!

I agree this has to do with relative rates. If 80% is what's available then it would be beneficial to offer more availability.

If there are better rates than 80% available it is, in metaphor if not always in fact, criminal to offer 80%.

As others have said -- the fixed costs in micro-loans are what cause the high interest rates. This is very mis-leading, *cough* should know better *cough*.

> Could you automate the loans so much that you could reduce the overhead costs to next to nothing?

I believe that's called a credit card.

Maybe centans missed this quote in the article: "Rolling over payday loans repeatedly might cost you big bucks; but it can turn out to be a good deal if you need the initial loan to fix your car, hold on to your job and avoid losing even bigger bucks in after-tax earnings."

Regardless, the state in most developing nations has no inherent ability to lend money to the thousands of small groups that groups like Grameen can and has.

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