Charging interest on a loan?

[TenBobNote]

I don’t agree with this. If it weren’t for interest, I wouldn’t loan you any money to build a business and nobody would buy bonds to finance a company. Money in the bank is being lent to expand the economy and create jobs. Exactly where do you live where interest on money is not productive?

I think you are missing the main point, while it may be true that people would not be as investment happy, they would still purchase stock to finance companies.

If there were no interest, spending would be based on savings, not (as many) loans.Therefore the economy still grows and creates jobs (maybe just not as quick).

I would argue the biggest reason interest is not usury is because of time preference which I briefly describe below.

 

[TenBobNote]

Hmmm… maybe you should submit this idea as a theological paper! Of course it would need to be fleshed out, and have footnotes and references. But I like the idea.

With more research on that general Austrian economic’s topic (and competing theories), I would be honored to submit such a paper.

 

[CDNowak]

I don’t agree with this. If it weren’t for interest, I wouldn’t loan you any money to build a business and nobody would buy bonds to finance a company. Money in the bank is being lent to expand the economy and create jobs. Exactly where do you live where interest on money is not productive?

Interest does not produce anything. It redistributes money (from those that need it to those that have it), but money itself is a tool for barter, not for breeding.

As TenBob pointed out, not all investing is interest based. Investing, ideally, should mean that each investor has a proportionate share in the risk taken by the venture. Venture Capital (the oldest form of investing, rose with the merchant economy) and the stock market are based on this idea. Even better is when all involved have real capital (ie that which money represents) invested, be it physical or mental capabilities, social capital, necessary tools and labor, etc. (see Mondragon)

A bank is a perfect counter example: those with less than $250,000 in a given bank have no risk here in the States, the bank itself usually has little risk, particularly in mortgages, as they prefer to give loans to people who can pay for less than the value of the property. The person taking the loan has virtual all of the risk, as if they cannot meet payments they lose their house.

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For those looking into economic theories, I suggest looking at microcapitalism and Islamic banking as well.

 

[JimG]

Interest does not produce anything. It redistributes money (from those that need it to those that have it), but money itself is a tool for barter, not for breeding.

As TenBob pointed out, not all investing is interest based. Investing, ideally, should mean that each investor has a proportionate share in the risk taken by the venture. Venture Capital (the oldest form of investing, rose with the merchant economy) and the stock market are based on this idea. Even better is when all involved have real capital (ie that which money represents) invested, be it physical or mental capabilities, social capital, necessary tools and labor, etc. (see Mondragon)

A bank is a perfect counter example: those with less than $250,000 in a given bank have no risk here in the States, the bank itself usually has little risk, particularly in mortgages, as they prefer to give loans to people who can pay for less than the value of the property. The person taking the loan has virtual all of the risk, as if they cannot meet payments they lose their house.

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For those looking into economic theories, I suggest looking at microcapitalism and Islamic banking as well.

The person taking out the loan does not take all the risk. Home loans are available at anywhere from 25% down to zero down. The borrower puts up little to nothing of his own funds to obtain a home far in excess of the value of money he had on hand. If he doesn’t pay, he may lose the house. The homeowner takes the potential upside risk–i.e., the home might appreciate in value. If it does, he keeps the profits. If it loses value, as in the recent housing crisis, the lender takes the loss. If the loan is insured, the insuror or guarantor takes the loss.

And I’m not going to be the first one to tell those retirees living on savings, to take all their money out of savings and put it into venture capital, thereby avoiding the sin of usury. Would any financial analyst tell them to do that?

 

[CDNowak]

The person taking out the loan does not take all the risk. Home loans are available at anywhere from 25% down to zero down. The borrower puts up little to nothing of his own funds to obtain a home far in excess of the value of money he had on hand. If he doesn’t pay, he may lose the house. The homeowner takes the potential upside risk–i.e., the home might appreciate in value. If it does, he keeps the profits. If it loses value, as in the recent housing crisis, the lender takes the loss. If the loan is insured, the insuror or guarantor takes the loss.

The source of the money (the depositors) have no risk. The bank has an enforceable contract to seize collateral (aka the house), on which they (under normal conditions) can still make a profit.* Also, the bank’s risk diminishes with every payment, but the borrower’s increases approaching a point where the bank has made a profit, but the “homeowner” could still lose the house.

*In the current situation they lost money, to a great extent, because the number of houses they ended up owning. The [im]morality of that and growing homelessness is another topic.

As for the clipped portion: I don’t argue ad emotion.

 

[JimG]

The source of the money (the depositors) have no risk. The bank has an enforceable contract to seize collateral (aka the house), on which they (under normal conditions) can still make a profit.* Also, the bank’s risk diminishes with every payment, but the borrower’s increases approaching a point where the bank has made a profit, but the “homeowner” could still lose the house.

*In the current situation they lost money, to a great extent, because the number of houses they ended up owning. The [im]morality of that and growing homelessness is another topic.

As for the clipped portion: I don’t argue ad emotion.

Every payment made by the borrower reduces the principal balance of the loan, and thus the homeowner’s stake in the home. If the borrower is smart, he will have a mortgage without pre-payment penalties and will be making principal prepayments to pay it down as quickly as possible. With each payment, the borrowers chances of loss become less. Whether the market value of the home increases or declines needs to concern him only if he has imprudently taken “home equity loans” thereby adding consumer debt to the home mortgage. And with the continuing paydown of the mortgage, the homeowner will be better able to sell it if necessary. If I’ve got only 12 payments left, a market decline really doesn’t stop me from selling.

And the whole point of making a substantial down payment is to insulate oneself against market fluctuations.

And as for this part: And I’m not going to be the first one to tell those retirees living on savings, to take all their money out of savings and put it into venture capital, thereby avoiding the sin of usury. Would any financial analyst tell them to do that? That’s not a matter of emotion. That’s a matter of sound financial advice. Since when is it safer for a person who * must depend* on investment income to live on, to invest in the stock market rather than CD’s?

 

[Abu]

sidbrown
Has the Catholic Church changed its teaching on this?

No.
Scripture, the Fathers of the Church, the decrees of councils and popes condemn the taking of interest on loans to the poor and the greed of usurers, but say nothing about the charging of interest in general.
Deuteronomy 23:20: “You may charge interest to a foreigner,” indicating that interest-taking is not presented as inherently evil or sinful. The larger ethical issue of the morality of interest-taking is not addressed in the Old Testament. Rather, interest was viewed only as a problem of social justice. The problem of commutative justice, i.e., of equivalence of value in an exchange of present for future goods, remained quite untouched (Thomas F. Divine, S.J., Interest, 10).

With free enterprise as developed by the Late Scholastics, the Church defined what is meant by usury. Session X of the Fifth Lateran Council (1515) gave its exact meaning: “For that is the real meaning of usury: when, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk.”
Consequently, as loaning money did involve loss of profit to the lender and further risk of loss from delay in returning the money loaned, this did justify interest that is just and justifiable.

The Franciscan St. Bernardine of Siena (1380-1444) was perhaps the first theologian to recognize that time of use had an economic value and, at least in certain cases, might be licitly compensated. St. Antoninus (1389-1459), a Dominican of Florence, seems to have questioned whether Aristotle was correct in saying that money is naturally sterile. Money alone, he said, is sterile, but, combined with knowledge and enterprise, it is fruitful. His *Summa Moralis *examined commerce and banking, and prepared the way for modern notions of interest, which generally regard proper returns on loans taken with just title as fair.

Today, the term “usury” is usually reserved for taking excessive (i.e., unusually high for the economic conditions) interest on a loan because of someone’s circumstances: The greed of the lender takes unjust advantage of the weakness or ignorance of the borrower. [See *Encyclopedia of Catholic Doctrine, Our Sunday Visitor].

 

[bquinnan]

No.
Scripture, the Fathers of the Church…

Thank you for the clear and concise explanation above.