Paycheck lenders and suchlike charge high interest because they have many defaults. I wonder if it is possible to change the incentives of the borrowers so as to increase the repayment rate and therefore decrease the required interest? My thought runs as follows: Suppose you borrow at the usual usurious rate, say 20%; but the lender agrees that, if you pay down the loan fully, he will return part of the interest payments to you, making the effective rate, let’s say, 15%. (Numbers made up, obviously.) Presumably this increases the repayment rate and therefore the lender’s profit, and shares some of that surplus with the borrower. Also, human psychology is strange; the lump-sum return of that 5% would probably feel like ‘free money’ to a lot of people, so it might have incentive effects beyond the actual dollar sum involved.
Against this theory, you would think this business model had already occurred to someone, it’s hardly very complicated. (For all I know this is how they operate!) And it does seem a little like selling saving and borrowing in the same package, which isn’t a very natural bundle, now that I think about it. Still, the human-psychology effect I mentioned might make it work even against that unnaturalness.