Reasonable Return on Interest and the Exploitation of the Debtor

The balance between the fact that capital has a cost and the need to protect the debtor is among the hardest issues in the debate on interest. The lender forgoes the use of money for a period and bears inflation, non-repayment, and liquidity risks. Demanding a return above principal is therefore not, by itself, exploitation. Yet an immoderate gain extracted from the debtor’s urgent needs, ignorance, or weak bargaining power cannot be legitimised merely by saying “there was consent.” Drawing the boundary requires a multi-dimensional assessment that goes beyond the interest rate.

The first point is whether the return demanded is proportionate to the real risks and costs borne by the lender. A reasonable interest rate may cover expected inflation, funding costs, administrative expenses, the cost of forgoing liquidity, and the borrower’s default risk. When the rate rises beyond what these elements can explain—especially when extraordinary returns are earned against risk that has been substantially reduced by collateral—the suspicion of exploitation grows stronger. What matters is not the nominal rate alone. File fees, insurance, commissions, late-payment penalties, and compulsory add-ons must all be counted so that the total cost of credit to the borrower can be assessed.

The second point is the borrower’s capacity to repay. Lending to a person whose ability to repay is weak, solely against high interest and heavy collateral, cannot be regarded as responsible lending. The European Banking Authority (EBA) treats a thorough assessment of the consumer’s ability to meet obligations before a credit agreement is concluded as a core element of responsible lending. The World Bank likewise recommends that credit be granted only when it is affordable for the prospective borrower, and that continuous rollover and multiple borrowing be limited because of the risk of over-indebtedness.

This approach yields an important moral and economic conclusion: that credit has been granted does not show that the borrower can truly afford it. Lending anew to someone whose income cannot cover instalments may provide short-term access to finance, yet in the longer run it can create a cycle in which old debt is paid with new debt. High interest, late fees, and repeated restructuring may force the debtor to keep paying without reducing the principal. The OECD notes that easily accessible short-term and digital credit, combined with high interest and extra charges, can draw borrowers into a debt spiral.

The third point is the gap in information and bargaining power between the parties. A firm that compares alternative sources of finance before signing a loan contract is not in the same position as a person who turns to the first available source for an urgent health or subsistence expense. If the borrower cannot understand the total cost of the contract, cannot reach alternative offers, or has no real option to refuse the credit, formal consent does not by itself make the contract fair. Protecting the financial consumer therefore requires not only disclosure but fair and responsible treatment.

The fourth point is the purpose of the debt and the vulnerability of the debtor. An entrepreneur who borrows to earn income from a productive investment can weigh financing cost against expected return. A person who borrows for food, shelter, or health—needs that cannot be postponed—often lacks real freedom to bargain. The same interest rate may therefore produce different social outcomes in different debt relations. Standard procedures should not be applied mechanically to vulnerable customers; when repayment difficulty arises, tools such as allowing time, restructuring, and referral to debt counselling should be used.

Interest-rate caps can help draw this boundary, yet they are not enough on their own. They may curb excessive rates, but overly rigid ceilings can also push high-risk borrowers out of the legal credit market. OECD assessments show that while caps may lower rates, they can also reduce access to credit for some riskier groups. Rate limits should therefore be applied together with transparency, affordability assessment, disclosure of total cost, scrutiny of unfair contract terms, and debt-restructuring mechanisms.

The line between a reasonable return and exploitation cannot be drawn by a particular interest rate alone. Reasonable credit is credit that is proportionate to real cost and risk, clearly understandable, suited to the borrower’s capacity to repay, and balanced in protecting the rights of both parties.