High Interest Rates for Loans in Chambar

Analyzing Loan Applicant Risk

A bank offers a personal loan to two different individuals. Applicant A has a stable, well-documented income and a long history of repaying debts on time. Applicant B has a variable income from freelance work and a limited credit history. The bank offers Applicant A a loan with a 5% interest rate and Applicant B a loan with a 12% interest rate. Which economic principle best explains this difference in offered rates?

Rationale for Differentiated Interest Rates

A lender's primary goal is to maximize profit. Therefore, a lender would prefer to issue a loan to a high-risk borrower over a low-risk borrower, because the higher interest rate charged to the high-risk borrower guarantees a greater return.

Explaining Interest Rate Differentials

If a lender had perfect and complete information about every potential borrower's ability and willingness to repay a loan, the interest rates charged to all approved borrowers would likely be identical.

A government proposes a new law that requires all banks to offer the same, single interest rate to every individual who qualifies for a personal loan, regardless of their income, credit history, or employment stability. The stated goal is to create a 'fairer' credit market. From a lender's perspective, what is the most probable consequence of this law?

Evaluating Fairness in Differentiated Interest Rates

Analyzing Components of Borrower Risk