Do interest rate caps protect poor borrowers?
Administrative costs are much higher with respect to multiple low value loans. For example, the administrative cost of making 10,000 loans of $100 each is much higher than the cost of making a single loan for $1 million. Because of the high costs of making microloans, interest rates on these loans have to be considerably higher in order to recover costs. Politicians and the general public tend not to understand this, and are often shocked to find low-income borrowers paying interest rates much higher than rich borrowers pay. Some countries impose legal caps on interest rates, hoping to protect borrowers. But when government imposes a cap, it is politically difficult to set the cap high enough to cover the administrative costs of tiny loans. The result tends to be that smaller (and poorer) borrowers can’t get loans, because no one can provide them without losing money.
