Charging interest on a loan?

[sidbrown]

Oftentimes we hear that usury is charging high interest on a loan. But on reading what Pope Benedict XIV has written in Vix Pervenit, it specifically says that ususry is any gain obtained from a loan, over and above the principle amount:
"The nature of the sin called usury has its proper place and origin in a loan contract. This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.
II. One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully, either to increase one’s fortune, to purchase new estates, or to engage in business transactions. The law governing loans consists necessarily in the equality of what is given and returned; once the equality has been established, whoever demands more than that violates the terms of the loan. Therefore if one receives interest, he must make restitution according to the commutative bond of justice; its function in human contracts is to assure equality for each one. This law is to be observed in a holy manner. If not observed exactly, reparation must be made.”
So is taking any interest whatsoever on a loan being condemned here ? Has the Catholic Church changed its teaching on this?

 

[markbrumbaugh]

The borrower not only received the principle amount, he also received the time value of that money. The lender had to pay interest to someone else to be able to lend it to the new borrower…plus his own costs in staffing, bad loans, etc.

 

[puzzleannie]

the amount given by the lender is more than the actual amount of cash received by the borrower, and includes his overhead expenses in granting and administering the loan so they are fairly recouped and that includes a reasonable profit for his share holders which is the purpose of his being in business in the first place.
All of these are legitimate because they are part of the cost of the lender aquiring the money he has available to loan out.

Most states have usury laws specifically to define what is exhorbitant over and above this. There would also be sin if methods to extract repayment are illegal or immoral.

 

[JimG]

It seems to me that a society in which no interest may be charged would be a very unproductive society indeed.

No interest on my checking account.
No interest on my savings account.
No interest on my CD’s.
No interest on my money market account.

No interest on home loans. No interest on car loans.
Got to love that, but who will make you a loan a zero percent without making it up in the purchase price?

No interest on U.S. Savings bonds, T-bills or Notes. No interest on the government debt!
Sorry about that, EE bond holders.

No interest on business loans. No business loans made. No economic growth.
No interest on corporate bonds. Sorry, bondholders, you should have bought stock.

Rent out that rental house, but don’t sell it on a contract for deed basis, or with a mortgage. You’ll only get back the principal.

 

[rwoehmke]

Why would it be usury and sinful to make money on investments. Jesus’ parable in the NT about the talents left with a mans servants seems to me to contradict the strict prohibition of interest or growth for money lent out. I also recall that this question has come up before I suspect this encyclical like many Papal pronouncements is not infallible, but essentially a Papal opinion. I seem to recall that something in the nature of the business transactions of that time and today’s has changed and that the prohibition of any increase whatsoever no longer holds. Try a search of the forums.

 

[manualman]

Context is crucial in many teachings. At one time, the Church really did teach that ANY charging of interest was sinful. So the teaching changed? No. Economics changed.

For most of history, trade was primarily in barter and money was just a temporary parking place for wealth not needed for practical things. Back then, the money itself had INTRINSIC value (a gold coin was literally worth its weight in gold). But a funny thing has happened in recent history. A couple hundred years ago, banks started issuing notes of paper that had no intrinsic value, but could be redeemed at the bank for coins of the noted intrinsic value. Governments got in on the act and issued paper currency backed by precious metals.

Then the REALLY fun stuff started. Governments, usually in time of war, started circulating more paper money than they had in precious metals to back it up. Word got out and inflation was born.

Back when paper money corresponded to a fixed weight of gold, there was little to no inflation. How could there be? But when kings overspent, the value of the paper declined over time and inflation was born.

Today, our green paper money is intrinsically worthless. It’s just green paper! It only has value because people know it is the basic currency of the USA and have a trust that others will consider it valuable. But like the kings of old, the USA spends FAR more than it takes in, so expect inflation to be BAAAAACKKK!

So is it sinful to accept ANY interest? Not anymore. The teaching hasn’t changed, economics has changed. Money no longer has a constant value over time. What is sinful now, just as was sinful then is to charge an interest rate that goes beyond what you could make in other investments of equivalent risk. That’s a hard thing to hang number on!

 

[CDNowak]

It seems to me that a society in which no interest may be charged would be a very unproductive society indeed.

Really, how is interest productive? How did civilization arise with the near universal prohibition of interest?

No interest on my checking account.
No interest on my savings account.
No interest on my CD’s.
No interest on my money market account.

Money sitting in the bank is not productive even if it is earning interest.

No interest on home loans. No interest on car loans.
Got to love that, but who will make you a loan a zero percent without making it up in the purchase price?

How much lower were prices (relative to annual income) before the widespread adoption of loans for every conceivable purpose (IIRC, this largely happened after WWII for non-commercial interests).

 

[JimG]

Really, how is interest productive? How did civilization arise with the near universal prohibition of interest?

Money sitting in the bank is not productive even if it is earning interest.

How much lower were prices (relative to annual income) before the widespread adoption of loans for every conceivable purpose (IIRC, this largely happened after WWII for non-commercial interests).

If money just sat in a bank, paying interest on deposits would be a net loser. Maybe the bank would charge the depositor for deigning to keep his money. But money doesn’t just sit in a bank. It is lent out.

Of course, it would not be lent out if no interest could be charged. Banks may lend out money to people to buy homes, but not if no interest could be charged. We could simply require people to save enough money to pay cash for their homes. I have no doubt that prices would be lower because there would be nearly no demand.

And, with a prohibition on interest, WW-II could not have been financed using War Bonds, which paid interest. So maybe there would be a peace dividend; or we might all just have become absorbed by Germany or Japan.

As for starting a new business, you could forget about business loans. Who’s going to make a startup loan for no interest? I guess the banks would have to take the risk of an equity stake, and the owner be willing to dilute his ownership. Why should interest be illegal but stock ownership legal?

 

[mlund]

Really, how is interest productive? How did civilization arise with the near universal prohibition of interest?

Slavery, serfdom, monarchical subjugation, and indentured servitude, mostly.

Money sitting in the bank is not productive even if it is earning interest.

That’s why we have fractional reserve banking. 80-90% of all money “sitting in the bank” is actually being loaned out. It provides the working capital for small businesses and home buyers as well as investments and silent partnerships in enterprises the produce jobs, goods, and services.

Not only must interest cover the cost of borrowing, the overhead of administration, and the impact of inflation, but it must also address the Opportunity Cost of not investing that money elsewhere for a return on owner’s equity.

How much lower were prices (relative to annual income) before the widespread adoption of loans for every conceivable purpose (IIRC, this largely happened after WWII for non-commercial interests).

Actually the Federal Government has been at the root of most of the loan-based inflation in places like Housing and College Education. By creating artificial subsidies and “progressive” loan requirements as a form of banking regulation they distorted the market. If it weren’t for those federally-subsidized student loans being thrown around like candy we’d never have seen the gross spike in college and university tuition and fees we’ve seen over the last 15-20 years.

The State screws things up with its power to run unsecured debt, print fiat currency in a deficit, and jail or otherwise destroy businesses and individuals that don’t comply with its insane whims - not interest-based loans themselves.

• Marty Lund

 

[CDNowak]

As for starting a new business, you could forget about business loans. Who’s going to make a startup loan for no interest? I guess the banks would have to take the risk of an equity stake, and the owner be willing to dilute his ownership. Why should interest be illegal but stock ownership legal?

Because stock represents something real (more real than our money, ironically). Interest is based, as you have shown, on trading of debt (indeed our current economic climate is largely due to the selling of debts and threat of increased interest on government debt).

Investing in a venture is a legitimate means of using money to further development of capital (money itself is not properly speaking capital, but the representative of a certain form of capital, the ability to trade). Direct investing also keeps the natural consequence (risk and reward) appropriately tied together.

The system of lending and borrowing for the necessities of life (shelter, transportation, education) does need examination. Is the current system where people are losing houses because they were bought largely through a loan just? When the houses sit empty or are destroyed (see: Flint, Detroit) while owned by the bank because no-one can afford the loan and meanwhile the numbers of the homeless are on the rise? Rather, have we not become “servants to the lender” (Proverbs 22:7)? So much for our proud condemnation of slavery and servitude.

Interest by its nature concentrates wealth in the hands of those who do nothing but breed money. They produce, particularly in an age of fiat currency, precisely nothing real. This wealth is prevented from remaining in the flow of commerce and invested in the people and business actually producing, and has a deleterious effect on economy.

Just as important, however, is the fact that usury was condemned repeatedly and strongly by the Church for centuries. Not just in encyclicals (on faith and morals…) but by Councils as well.

 

[sidbrown]

Just as important, however, is the fact that usury was condemned repeatedly and strongly by the Church for centuries. Not just in encyclicals (on faith and morals…) but by Councils as well.

It was condemend in the past, but the teaching has been changed and presently it is taught that it is not a sin to charge a reasonable amount of interest on a loan. Did you ever hear of anyone going to confession and confessing the sin of collecting interest on his CD account? Any priest would tell you that it is not a sin to sign up for an interest bearing CD in the bank.

 

[JimG]

If collecting interest is sinful, then those retirees trying to live on their savings will be doubly penalized. First, by having to somehow repay all the interest they collected on their savings over the years, (while those who spent freely all their earnings will be free of this penance), and secondly by being unable to live on the earnings from their current lifetime savings–with zero interest currently, and 40% to 60% declines in their funds invested in stocks.

Why am I reminded of the parable of the stewards: Jesus praised those who made a good return on their master’s money, but condemned the one who buried it for safekeeping. Well, the who buried it sure didn’t commit usury.

Risk and reward are always tied together, even when talking about interest. Municipal bonds are less risky than a loan to one’s brother in law (usually).

It just seems odd that the Church should take a position (if indeed it does) in which all forms of investment are allowed except those involving debt and interest. It makes no sense.

PS–which reminds me–Does the Vatican have no savings? If it does, does it collect no interest?

 

[bquinnan]

Context is crucial in many teachings. At one time, the Church really did teach that ANY charging of interest was sinful. So the teaching changed? No. Economics changed.

For most of history, trade was primarily in barter and money was just a temporary parking place for wealth not needed for practical things. Back then, the money itself had INTRINSIC value (a gold coin was literally worth its weight in gold). But a funny thing has happened in recent history. A couple hundred years ago, banks started issuing notes of paper that had no intrinsic value, but could be redeemed at the bank for coins of the noted intrinsic value. Governments got in on the act and issued paper currency backed by precious metals …

I’m intrigued by this explanation, but unconvinced. Even if we used gold and silver (or bank notes representing actual gold and silver), loaning out gold or silver has always incurred a cost to oneself, such as having to do without whatever those metals might have enabled one to purchase during the time in which they were borrowed, or even the possibility of using the gold and silver to produce a profit during that time.

For example, if I might have used the gold to buy an extra plow and pay and extra farmhand this year, and then I could have sold the extra crops this would hopefully have produced. Ideally, I would then have more gold than before, not just the gold I loaned out. But suppose you had a brilliant idea on how to make an even greater proft with that gold in that same year. If I loan you the gold, you would make a profit, but wouldn’t it make sense that I should get something for the profit I gave up?

Or perhaps you didn’t have an idea for a profitable business venture, but merely had a greater, more immediate need, such as a home. I could loan you the gold, but I’d still be giving up a potential profit. To loan out my gold at no interest might be very kind, but if you would be able to reimburse me for the profit I likely gave up, wouldn’t it be fair to do so?

There is a second cost of loaning money, be it paper, gold or silver – risk. Whenever you loan out something, there is a possibility you won’t get it back. The size of that risk depends on a variety of factors, including the credit history of the borrower, and it must be weighed against the risks of other possible uses (if I spent the money on farming equipment and labor, there is a risk of crop failure), but doesn’t it make sense to reimburse someone for taking a risk they were not obligated to take? If one is going to make a habit of lending out money, charging interest helps protect against those loans that will inevitably default from time to time.

You also mention the fluctuation of value that paper currency suffers, but gold and silver are subject to the laws of supply and demand as well, their buying power varying depending in part on their availability, as well as the availability of the items being purchased. Therefore, gold loaned out today might not have exactly the same value in a year.

Thus, I really don’t see how the use of paper currency instead of gold and silver relates to the morality of charging interest. I do see where the ability to charge interest could be abused, and how might overlook things like opportunity cost or risk when assessing the morality of charging interest, but I don’t see how the laws of economics have changed in a way that would affect the morality of charging some level of interest.

 

[JimG]

I’m intrigued by this explanation, but unconvinced. Even if we used gold and silver (or bank notes representing actual gold and silver), loaning out gold or silver has always incurred a cost to oneself, such as having to do without whatever those metals might have enabled one to purchase during the time in which they were borrowed, or even the possibility of using the gold and silver to produce a profit during that time.

For example, if I might have used the gold to buy an extra plow and pay and extra farmhand this year, and then I could have sold the extra crops this would hopefully have produced. Ideally, I would then have more gold than before, not just the gold I loaned out. But suppose you had a brilliant idea on how to make an even greater proft with that gold in that same year. If I loan you the gold, you would make a profit, but wouldn’t it make sense that I should get something for the profit I gave up?

Or perhaps you didn’t have an idea for a profitable business venture, but merely had a greater, more immediate need, such as a home. I could loan you the gold, but I’d still be giving up a potential profit. To loan out my gold at no interest might be very kind, but if you would be able to reimburse me for the profit I likely gave up, wouldn’t it be fair to do so?

There is a second cost of loaning money, be it paper, gold or silver – risk. Whenever you loan out something, there is a possibility you won’t get it back. The size of that risk depends on a variety of factors, including the credit history of the borrower, and it must be weighed against the risks of other possible uses (if I spent the money on farming equipment and labor, there is a risk of crop failure), but doesn’t it make sense to reimburse someone for taking a risk they were not obligated to take? If one is going to make a habit of lending out money, charging interest helps protect against those loans that will inevitably default from time to time.

You also mention the fluctuation of value that paper currency suffers, but gold and silver are subject to the laws of supply and demand as well, their buying power varying depending in part on their availability, as well as the availability of the items being purchased. Therefore, gold loaned out today might not have exactly the same value in a year.

Thus, I really don’t see how the use of paper currency instead of gold and silver relates to the morality of charging interest. I do see where the ability to charge interest could be abused, and how might overlook things like opportunity cost or risk when assessing the morality of charging interest, but I don’t see how the laws of economics have changed in a way that would affect the morality of charging some level of interest.

Interesting post. Of course, there is always opportunity cost and risk.

Thus, I can’t see any basis for calling the charging of ANY interest as “usury” and therefore immoral.

In fact, at the moment, the fact that I’m earning a good deal less than 1% on bank deposits strikes me as immoral. Cheating savers to encourage spenders and borrowers? First we’ve been hit by decimating our stock assets, now our savings accounts are becoming worthless and earning zero. Now, that’s injustice.

 

[Just_Lurking]

Clearly, Benedict XIV was wrong about the immorality of charging any interest on a loan. But Vix Pervenit wasn’t infallible, so what’s the big deal?

 

[CDNowak]

Interesting post. Of course, there is always opportunity cost and risk.

Thus, I can’t see any basis for calling the charging of ANY interest as “usury” and therefore immoral.

In fact, at the moment, the fact that I’m earning a good deal less than 1% on bank deposits strikes me as immoral. Cheating savers to encourage spenders and borrowers? First we’ve been hit by decimating our stock assets, now our savings accounts are becoming worthless and earning zero. Now, that’s injustice.

I suggest reading the philosophers then, starting with Aristotle’s Politics Book I, parts 9&10.

In case you haven’t noticed, the interest earned from loaning to/depositing in the bank is always significantly less than the rate they in turn lend at. In other words they always lend others’ money at a usurious rate, which is the injustice you ore currently aware of but will forget once you are satisfied with the rate you are given.

Clearly, Benedict XIV was wrong about the immorality of charging any interest on a loan. But Vix Pervenit wasn’t infallible, so what’s the big deal?

But the consistent and universal teaching of the Church on usury until the Reformation was that all usury was immoral, based on the Biblical condemnations of it. How can we argue that Tradition has value if we discard it when convenient.

 

[JimG]

OK, if any charging of interest by anyone constitutes usury, and usury is always sinful, maybe we should just stop all interest entirely. Bank deposits will pay zero, which they nearly do now; car loans will be at zero percent–of course that can be recouped in the purchase price, U.S. Savings bonds will be zero, condemning widows to penury who depended on those for living expenses. Housing loans will be at zero percent–a boon for housing provided there were any lenders left.

But why take the risk and forgo the opportunity for other uses of money by lending to anyone, if there can be no reward?

I guess I’m just not getting it. Sorry, Grandma, we’re cutting off all your interest income. Too bad. Is that social justice for Grandma?

 

[TenBobNote]

Of course it’s not a sin, its human action, it’s called time preference. When you loan someone money you provide them a service and charging for providing a service is NOT usury. The specific service is saving a person time they would have had to spend saving money, time is scarce.

 

[JimG]

Of course it’s not a sin, its human action, it’s called time preference. When you loan someone money you provide them a service and charging for providing a service is NOT usury. The specific service is saving a person time they would have had to spend saving money, time is scarce.

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.

 

[markbrumbaugh]

Really, how is interest productive? How did civilization arise with the near universal prohibition of interest?

Money sitting in the bank is not productive even if it is earning interest.

How much lower were prices (relative to annual income) before the widespread adoption of loans for every conceivable purpose (IIRC, this largely happened after WWII for non-commercial interests).

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?