I’m asking specifically about people in the U.S. looking to borrow from a lender.
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Your friend David borrows $20-50 here and there because he keeps forgetting his wallet at home. Of all the 15 times he’s borrowed money, he always pays you back the very next time you see him. You even loaned him $500 once and he paid it back before your rent was due without having to be asked.
Your friend Jason borrows money at about the same rate, but you have to remind him over and over again that he owes you money before he’ll pay you back. You eventually get it back, but it’s a hassle.
Your friend Barb has borrowed money a few times, but she never pays you back. You have to ask her over and over to get anything, and even then, she begs poverty and gives you back only half or less of what she owes.
Your friend Susan has never borrowed money at all.
How likely are you to loan $20 to David, Jason, Barb, and Susan? What about $500? David’s a low risk. You’d probably loan him $20 with no interest. You kinda need the $500 yourself, so you might charge him $520 to borrow the $500, but you’d be reasonably certain that David would pay you back quickly.
Jason, on the other hand is a higher risk. Sure, he always pays you back, but he’s always late. This is a bit of a problem for you because you also have uses for that cash. You want to give him some incentive to pay you back, so you tell him that you’ll loan him $20, but he’s going to owe you $25 if he doesn’t pay you back before the end of the month. For the $500, you might not even loan it to him, but if he agrees to pay you back $700, you might be willing.
Barb though, you’re not going to loan any money unless you can just do without it yourself. Maybe you’re willing to loan her $10, but $20 is pushing it. There’s no way that you’d trust her with $500 though.
Susan’s a different story. You don’t know much about her. Is she like David or Barb? So you might treat her a bit like Jason until you know how she’ll pay you back.
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