[ohazi]

High interest is only for high risk when the lender is forgiving more of their loans. That's the risk - too much forgiving means they need to make up the difference with a higher rate for the fewer people who do pay it back.

The parent is arguing (correctly) that you can't have both high interest rate and a low/zero rate of loan forgiveness while claiming to be ethical.

[joeyrideout]

Respectfully, zornado is correct and I'm not sure why he's being downvoted.

The market cannot operate without a free market for risk-taking and a free market for assessing confidence of repayment as expressed in interest rates. Borrowers are not entitled to money at a set interest rate in the private market (I would argue this should apply to the public market as well, or at least the markup through banks should be minimized). Saying "these interest rates are too high" is the credit market equivalent of saying "the price of this car is too high, give it to me cheaper".

The individual defaults if they file for bankruptcy. Until then the terms of the loan, voluntarily signed, determine an interest rate and an obligation to repay. The lender is not obligated to forgive a loan; if that were the case credit liquidity would be nonexistent. (IANAL)

[ohazi]

Both of you are wrong.

> Another of these apps, Okash, took this logic of stigmatization even further, harvesting users’ contacts and calling bosses, parents, and friends to shame defaulters into repaying.

(emphasis mine)

This has nothing to do with free markets for risk-taking or confidence assessment. If you want markets like these to work well, you build them using information, not shame. Shame is a tool of last resort used by abusive lenders who are too lazy/stupid/corrupt to do their homework.

This is just another bog standard case of powerful actors abusing weaker ones. These lenders are targeting populations who don't have the knowledge or the resources to "correctly" default or file for bankruptcy, or to defend themselves against abuse when they do manage to do it correctly.

If the borrower defaults, the lender is supposed to stop hassling them and write off the loan. There are a whole bunch of other things they can do, but again, those things are not ethical.

[ryan_j_naughton]

That's treating delinquency and default as the same thing. Even if your debt isn't forgiven, if you repay late, then the present discounted value of that future money is worth less to the creditor than had it been paid on time.

Tala, Branch, and all these fintech firms are taking out debt themselves in order to lend to these individuals. Thus, they are paying interest. If you are late in your payments, they are floating you on their debt lines for longer.

Thus, even without loan forgiveness, a higher interest rate make sense to account for the risk if delinquency.

Secondly, even if they don't forgive the loan formally, internally it will eventually be taken as a writedown. You can default on a loan and they never get the money back without loan forgiveness existing. That again affects their rate of return and thus needs to affect their interest rate.

If instead they shouldn't be allowed to charge above a certain interest rate, then that will internet come with denying credit to a lot of the population.

People always want to have it both ways: don't discriminate against poor people by denying them credit but don't charge them the interest rates that are required to offer them credit. It's why people simultaneously complain about how sub-prime was predatory but also complain that the banks aren't doing enough to get low income people into home ownership. You can't have it both ways.

I'm not saying that there shouldn't be regulation limiting the types of loans allowed, interest rates, etc. Uneducated people in developing countries are probably not the best rational actors when it comes to making complex financial decisions. Some regulatory paternalism (and even libertarian paternalism by the govt through forcing clearer information on loan terms) is definitely warranted.

My point is fundamentally you can't have it both ways. Interest rates are a reflection of risk. And the result would be denying people access to financial services. We should be honest ourselves about these tradeoffs instead of pretending we can simply have our cake and eat it too.

There is only so much philanthropy money from the Gates Foundation, World Bank, etc. The rest of the capital to fund development ultimately comes from the private sector wherein there must be a sufficient return on that capital to justify its use in that scenario. Otherwise, the capital will simply just go elsewhere.

And again there could be other solutions. A massive overhaul to tax policy worldwide could provide a massive new source of capital to solve the problems of economic development. But I'm not holding my breath for such changes in a world where the super rich have only become more adept at tax evasion.

Disclaimer: I worked in online lending at Avant. I know some of the Tala guys as I live in Santa Monica. And my wife works at the World Bank in international development.

[human20190310]

> The rest of the capital to fund development

The article mentions "...high rates of borrowing on weekend nights as evidence that loans are marketed and taken in moments of inebriated revelry."

Assuming that's true, and considering all the data these fintech operations are collecting, surely they can't believe they're funding development rather than consumption.

[wutbrodo]

> high rates of borrowing on weekend nights as evidence that loans are marketed and taken in moments of inebriated revelry."

Is it evidence that they're marketed as such?

[vageli]

Is it really unusual to start a business after the hours of your usual occupation? Where is the correlation with inebriation?

[Retric]

> then the present discounted value of that future money is worth less to the creditor than had it been paid on time.

That’s only true if the future repayment was interest and fee free. When repayment is at a high interest rate this is just more profits.