Rural credit markets in many developing countries are characterized by imperfect information and the co-existence of formal and informal credit institutions. Lenders, especially informal lenders, use indirect or direct screening mechanisms to address problems of incentives and enforcement. Based on this understanding, this study develops a theoretical model for the determination of the interest rate on loans from informal sources. Utilizing data from a World Bank-sponsored Vietnam Living Standard Survey of 1997-98, I also investigate the empirical determinants of interest rates on informal loans, as well as the factors underlying the decision byhouseholds to utilize informal credit sources. Results indicate that both loan terms and householdcharacteristics significantly affect borrower’s choice of which sector to borrow from and lender’schoice of interest rates.