Hear the term “loan shark” and what do you think of? Probably a desperate borrower going to Tony Soprano and, later on, having his legs broken for paying late. No doubt that occurs. But as I press my first-year contracts students to understand, those who lend money to the poor, even at extravagant rates of interest, fill a market niche. Just like everybody else, people with bad credit want to borrow money. And because capital markets are effectively closed to them, they have to turn to unregulated lenders.
The trouble has long been that we lack good data on whether their typical borrowing experience involves repayment (admittedly at exorbitant rates) or some version of those broken legs. Happily, that gap has been filled. A new NBER paper by economists Kevin Lang, Kaiwen Leong, Huailu Li and Haibo Xu offers a picture of how the sector works in practice. The authors studied roughly 100,000 loans made to some 1,000 borrowers by unlicensed lenders in Singapore.