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Comment by Tichy | Hacker News Reader

I don't understand how an interest rate of 70% could be fair, and who in their right mind would agree to such a rate?

If the default rate is high enough then 70% could be what it takes for the lender to make a profit. Someone who thought that was the best rate they could get could agree to such a rate.

Then they should focus on lowering the default rate, not increasing the interest rate. The Grameen bank gets repayment rates of over 98%.

Assuming a cost of capital of 3%, if they need to charge 70% interest to make a profit then roughly 40% of their loans are defaulting. A 40% default rate means people are using these loans for consumption, not investment. You need better financial education then, not better access to credit.

That sounds like a good next step. Move from no access to capital to lousy access to better access. The attitude I saw from critics of the program was that some how people should go from no accss to good access, and if that's not possible they should stay with no access.

Perhaps it's not the default rate - but the overhead. Those loans are pretty small.

Yet it's possible to run a current account on far less? I doubt that's the problem.

Or perhaps it is just a sign of an immature market. They charge so much because they can get away with it.

With competition the rate should go down. Even if it is mainly caused by overhead, as companies will figure out how to operate more efficiently.

Feel free.

Nothing is stopping you from loaning your money at a lower rate, from providing education, etc.

What? You only tell other people what to do with their money? If your advise is not good enough for your money....

It's ok if your costs are that high (70% of 50US$ is just 3.5US$ which even with a very little salary is hardly enough to do due dilligence). Usually the rate of return for micro-entrepreneurs is far above 100% so it's still a good deal. The alternative would be not to give any loans which would hurt the poor most.

If you are interested in this topic you check out my master thesis of 2004 (if you don't mind my crappy English) here: http://www.scribd.com/doc/92714/Microfinance

It covers exactly that topic.

Actually, it's interesting. If you look at prosper.com and people-to-people loans, the high risk loans run at exceedingly high rates. It's easy to assume lenders are sharks until you look at the interest rate required to make a profit which will offset defaults and try it yourself. As for who would agree, anyone who can get a greater than 70% risk-adjusted return on their money who has no other source of funding.

So why are they primarily giving out high risk loans? Is it really a good idea to encourage poor people to undertake high risk ventures?

Thats because such rates typically assume that the loans run for a long time. If the loan is only for 14 days the interest (given as %apy) quickly skyrocket.

You mean it is not a yearly interest, but a constant? Like "we give you 100$ if you promise to pay us back 170$ whenever you are ready"?

It is yearly interest, but the loan terms are typically much shorter. If the loan only lasts 14 days, a quoted APR seems much higher than is typical for, say, a mortgage, which lasts 30 years.

This makes some sense if making the transaction has a fixed cost. If I had to spend the same amount of time to fill out a 14 day loan as a multi-year one, I'd need to price the shorter one higher even if I wanted the same APR otherwise.

...but if the borrower is on the same thin financial ice when the loan is due as he or she was when the loan was taken out, and rolls the loan over, then things get out of hand very quickly. This is how the people offering paycheck-anticipation loans rack up their profits.

VCs charge far more than 70%. Is that fair?

Please elaborate? Do VCs have an interest per year?

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