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Comment by Biologist123 | Hacker News Reader

As I understand it, the way these apps work is:

1. The loan interest rate is set relative to a base default rate of a population sample of lenders. Therefore very easy to predict capital return, but means interest rates are usually high to cover high rate of defaults.

2. Defaulting loans are sold to local debt collectors for collection, who presumably are quite ruthless.

3. There are a few companies which white label the software needed to run this sort of scheme, so presumably the operator only has to drop in capital.

If you have further information on how these businesses work, please respond!

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I built the system of reputale a Mexican startup that did online lending, so I have some insight:

1. This is a real problem in Mexico: people complain about high interest rates. However, for these kind of bullet loans , you see 30% of default in the FIRST loan. And back when we were starting on 2013-14 we had up to 70% of default due to fraud.

So, with around 30% 1st default and about 15% 2nd default, we created revenue models that considered that, CAC, cost of funds and opex to define the interest rate... that very high APR really was not making people rich overnight.

See, one problem in Mexico is that defaulting in a loan is not a crime, so theres legally NOTHING a lender can do to make you pay if you decide not to. The only repercussion is that you Credit Buro gets tainted, for 6 years. I've read of people that get a $100,000MXN loan and then just change phones, move apartments and wait for 6 years to clean their credit buro.

2. Default loans deffinitely are sold, for cents to the peso. But usually only the ones that are very old. Now, there are different types of collection agencies. Where I worked, we tried to he very reputable so we only chose the least shady ones. But in reality the only thing they could do is call you. Even calling your provided references is illegal. We actually stopped asking for references IIRC.

3. I dont know but dont doubt it. BUT, have a look at Fineract/MifosX: an open source loan management system. Its relatively easy to setup a lending operation using that. It's pretty comprehensive.

All in all, there are very shady app/online lending services in Mexico. But it is nothing exclusive of the internet. Way before this, you heard of lenders that would do "collections" by getting some tough guys from prison (yup, in some prisons they can get out for the day like nothing, for some cash) and knocking at the debtor's door with baseball bats, wrenches or any other hard weapon . If you didn't pay they broke your legs or worse.

That now it happens online is only the natural evolution of the shithole that is my country, unfortunately.

> See, one problem in Mexico is that defaulting in a loan is not a crime

Nor should it be. Lenders like to conveniently forget: the risk of default is the reason they charge interest. If there was no risk of default, you couldn't really justify charging much interest, could you?

Issuing a loan is a business arrangement, and default is one of several clearly defined ways of exiting that arrangement. Lenders have been very successful in their attempt to smear default as some sort of moral failure. Like you're some kind of bad person for making a sensible business decision!

Is the US any different? I'm pretty sure it's almost impossible to get a criminal conviction for bad debt these days. Maybe in a really extreme case like a deliberate fraud scheme that used defaulting as a key part of the process, but not a normal person just normally not repaying a loan.

The US requires you pay back loans and has a scheme of forcing that including confiscation of income from your emoloyer. You can declare bankruptcy to get around that, but it isn't automatic, and the courts can tell you no you have to pay your debt (though in practice anyone going this far is bad enough off that they get out of debt maybe owing pennies)

> > defaulting in a loan is not a crime

> Nor should it be.

Sometimes it should be. If you have the money to pay back a loan but just choose not to, that should be a crime. Similarly, if you somehow know that you won't be able to pay back a loan before you take it out, but you take it out anyway, that should be a crime too.

But isn’t the risk rolled into the interest rate ?

If everyone pays the usurious loans then the lender double dipped

Are the loans not insured ?

IMHO all of this should be clear up front - the consequences of not paying should be part of the contract: credit bureau, jail time, first-born child…

Why isn't insurance fraud legal, since the risk is rolled into the premiums?

Because insurance companies want to be middle men that do nothing and just collect a monthly premium. It's best if the thing you're insuring against never happens.

That's the point - if you can't count on legal system to prevent loan abuse/fraud then everyone pays higher interest or people start doing illegal things to collect

Risk is one reason, another is that banks are businesses and charge a fee, another is that people prefer to keep their money immediately available for themsels rather than giving up liquidity. Money gives us the power to decide at the drop of a hat, lent out money requires cooperation or patience.

The article also states that the apps deliberately obfuscate the costs (50% fee deducted from the loan amount) and terms (due in 7 days with 300% interest) of the loan.

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