Problem

It is quite common for households in poor communities to rely on loans from their families and neighbors. Such loans often carry very low interest rates, sometimes as low as zero percent.

a. Why are family and friends willing to lend money at such low rates in credit markets where households are typically credit-constrained?

b. How can one reconcile the idea of loans with zero percent interest with the existence of moneylenders charging rates above 100 percent per year?