[nemild]

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]

Introducing 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]

I'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.