Why are there different credit rates in each country?

Question

I live in Paraguay, and here credit rates begin at 16% and go up to 50%. In Germany you can get a loan for a lot less. Why is that?

Answer 1

My first thought was that it must be due to inflation, which causes such differences in many cases since a creditor needs to make back more than the rate of inflation in order not to effectively lose money. But it seems that Paraguay currently has only a very modest rate of inflation, about 3%.

Other possible reasons for different credit rates:

• Regulation or cartels, that prevent competition
• Differences in default risk

The latter is most likely. It means that if debtors are generally poor and are often completely unable to pay back the loan, or if there is no effective way to force uncooperative debtors to pay (e.g. when there are weak laws or overworked courts), then creditors will lose a lot of money to defaults and have to raise rates to compensate for this.