You Would’ve Thought They Worked for Moo-dy’s

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1 Response

  1. A.J. Sutter says:

    The apparent self-evidence of the idea of that if someone is more likely to default you should charge them more money for a loan has long intrigued me. As the Talmud says, “Let your ears hear what your mouth is saying” — if they are more likely to default to begin with, charging them higher interest seems to make their default even more likely.

    Is there empirical evidence that higher-interest rate loans have default rates no worse than other loans? How about more specifically, any evidence for default rates monotonically increasing (or not) with interest rate charged?

    If default rates don’t monotonically increase with interest rates, then isn’t the ostensible reason for charging higher interest rates falsified? If they do monotonically increase with interest rates, then isn’t there an element of self-fulfilling prophecy in the reason given for higher interest rates? And if default rates are low enough that in the aggregate, loans to high risk borrowers can be profitable for the lenders, might there not be some lower rate of interest where lenders could still make money, but the lives of fewer borowers would be churned up by default? (You could call that a socially responsible interest rate.)