How do we determine usury?

[HopingforGodtohelp]

I was wondering a bit about the sin of usury. People generally think of it as charging a very high interest rate. But what if someone were to make a business out of lending to the very poor and desperate. Let’s say these people had a 50% chance of paying the loan back.

You can set up the equation

(1+r)(1-d) to be the expected value of your loan. r being the interest rate you are charging, and d being the default rate.

If we assume 2% is the risk-free interest rate (it’s a little bit lower now, but usually, this is about right), then we can say that any lender who wants to stay in business wouldn’t choose a loan with an expected value less than (1+r)(1-d)=1.02. Now, if you add .5 as d, as I mentioned earlier, you get (1+r)(1-.5)=1.02, you can divide both sides by .5, and get (1+r)=2.04, then subtract 1, and you get r=1.04, or 104%!

If people saw someone charging a loan of 104%, I suspect people would call it outrageous and usurious. Note, this is just the interest rate needed to on average equal lending to the government. In truth, the interest rate needed to even stay in business would likely be a lot higher because of risk premiums. Some microcredit programs have pretty high interest rates. Would it be immoral to make a business out of lending to the poor, even knowing that not doing so might deprive them of credit? Should we hope they get money some other way? I don’t know what the answer is here

 

[Gorgias]

Now, if you add .5 as d, as I mentioned earlier, you get (1+r)(1-.5)=1.02, you can divide both sides by .5, and get (1+r)=2.04, then subtract 1, and you get r=1.04, or 104%!

This presumes that those who default, never pay anything on their loan. In addition, it seems to presume that there’s no attempt to mitigate the “50%” figure, by some approval process or identification of collateral.

It also presumes that the lender won’t sell off the loan to a debt collection agency and see at least some of the remaining amount owed, or attempt to consolidate the debtor’s total amount owed into another loan, in an attempt to get an even larger share of their money owed (to whomever).

Would it be immoral to make a business out of lending to the poor, even knowing that not doing so might deprive them of credit?

Have you seen some of the rates that “paycheck loan” companies charge? It really is unconscionable…

 

[Genesis315]

In addition to the technical aspects of usury as defined by the Fifth Lateran Council (see below), there is also the general prohibition against oppressing the poor–one of the four sins that cry out to Heaven for justice. How defaulters are treated and the impact of the interest being charged should be taken into account when determining the morality. With care, it certainly can be done in a way that helps, rather than harms the poor. Which brings me to Lateran V.

Fifth Lateran Council

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.

Note, the context of this definition is in a defense of non-profit credit organizations which were set up to help the poor by way of loans, but which charged a moderate interest to defray costs, etc.

Fifth Lateran Council 1512-17 A.D. - Papal Encyclicals

 

[Montrose]

Modern Catholic Dictionary:

USURY. Taking of excessive interest for the loan of money is the modern understanding of usury. In essence, however, usury is the acceptance of a premium for the mere use of a thing given in loan. Objectively it is the premium paid for a pure loan. The word has come to mean taking advantage of another who is in need. As such, it is forbidden by the natural law, because it is contrary to commutative justice. In the case of the poor, it is also a sin against charity.

Originally, in Jewish and Christian tradition, usury meant taking any interest for a loan. It was forbidden among the Jews (Exodus 22:25; Leviticus 25:35-37) but was permitted in dealing with Gentiles. Christ, explaining the precept of charity, made no distinction between Hebrew and Gentile and stated that loans must be gratuitous (Luke 6:30; Matthew 5:42). The Catholic Church for centuries reflected this concept of usury and still teaches that, where something is loaned and later returned in kind only, no profit may be made by reason of the contract itself. Concrete circumstances, however, relative to the economic position of the lender and borrower may be involved and change the effects of the contract. Four external circumstances have an economic value and therefore constitute titles to a proportionate compensation over and above the restitution of what was loaned. They are: actual damage, loss of profit, risk to the object loaned, and danger from delay in returning what was lent. Only such titles, external to the loan, when truly present, justify the right to claim and the duty to pay a just rate of interest on money loaned.

Capitalism, with unlimited opportunities for investment, changed the function of money so that it can fructify. Consequently loaning money did involve loss of profit to the lender and further risk of loss from delay in returning the money loaned. By the end of the eighteenth century the distinction between usury and interest was recognized in civil law. The Church also recognized the distinction so that now only exorbitant interest is called usury and considered morally wrong. In the process, however, the Church’s basic teaching on the subject did not change. Injustice surrounding money lending was and remains condemned. What changed was the economic system. As this changed, the circumstances under which an injustice is committed changed. The Church necessarily permitted what was no longer unjust. (Etym. Latin usura , use of money lent, interest, from usus , use.)

 

[whichwaytogo47]

Usury is charging an interest rate beyond what is reasonable in which reasonable is the ability to pay and the reasonableness that someone will pay the money back. The rate that is onerous depends on the inflation rate and the default risk. In a deflation environment with someone who’s likely to repay, even a 10% APY could be usury, such as someone paying 10% on a car loan despite having a great credit score.

Ability to pay is the likelihood of default. You can and should charge a higher interest rate if someone has a higher likelihood of not being able to pay it back, but also its reasonably affordable.

But if you are certain that someone cannot pay the money back and you are a predatory lender / loan-shark (aka such as 14% every 2 weeks), you shouldn’t be lending the $$$. You’re either doing it because you plan to break that person’s legs or because you want to make bankruptcy very difficult to do or for a very tiny amount of money (aka less than $1,000). Payday lenders are in this kind of category as were members of the mafia. Credit cards are not usury as long as they don’t attempt to claim bankruptcy fraud to prevent people from discharging debts they cannot repay. To do so, would be to benefit from the high interest rates without accepting the risk that someone will be unable to repay. Bankruptcy protection is to protect someone from having their assets liquidated or wages garnished; it should not be used as a deliberate attempt to not pay your debts. You should have integrity. But just because you have the $$$ to pay off your debts does not mean you can afford to pay off the debts and the law might have exceptions that allow you to shield certain monies from creditors (aka retirement assets).

But charging 40% APY on a loan doesn’t automatically make a loan usury if the person has or will have the capability to repay the loan but has a high likelihood of choosing not to pay back the loan. Likewise a 40% interest rate would not be excessive in a period of inflation exceeding 20% (semi-hyper inflation).

 

[JanR]

Anyone who is a predatory lender is guilty of usury.

 

[InThePew]

Have you seen some of the rates that “paycheck loan” companies charge? It really is unconscionable…

Not to mention their fees, the ease with which they’re willing to lend money and their ruthless approach to defaulters. Rather than loaning out money to high risk individuals it would be better to refer them to community organisation which can help them with budgeting, debt consolidation, etc. Interestingly, Sharia (Islamic) Law prohibits the collection and payment of interest by lenders and investors - essentially because of the (what we would call) Old Testament laws against usury and so an equity sharing model is used instead.

 

[Aulef]

This notion that usury is charging very high interest rate is recent and it isn’t part of Church teaching.

Usury is actually charging for more than the lender has lended. It is as simple as that. For a deeper understanding, I recommend first reading the encyclical Vix Pervenit, by Pope Benedict XIV. And I can develop more if needed.

Once we understand this definition of usury, it becomes easier to address concrete examples.

In your case, I don’t have enough information on the ‘r’, so it is hard to know whether there is usury there. By its turn, raising the interest because of default rate ‘d’ is usury for it is charging for a loss that didn’t actually occur (it is based merely on a probability).

 

[Montrose]

Did the Church Change Its Stance on Usury? | Catholic Answers Magazine