A Moral Limit on Interest

I'm trying to sound this out in my head, so bare with me, but...

Should there be a legal limit as to how much interest can be charged on any particular loan?

I understand that a business will try to make money off of lending money by charging interest. But I don't see why there should ever be a point where the interest charged- even on overdue payments- should be more than the pricipal amount owed. (ex. a $100 debt should never have more than $100 in interest, meaning the debtor should not be made to pay more than $200, total, on a $100 loan)

I feel that asking anything more is just greed. On top of that, they come up with things like compound interest where you are not charged interest based off your principal, alone, but the principal plus the accrued interest, meaning they get more and more money as time goes on. This extends beyond mere security or risk-management practices and goes right into immoral profiteering.

Concepts like limitless interest and compound interest lead to these runaway debts where people- for some reason or another- end up paying for very long, protracted periods of time- or forever.

Do you consider this a moral practice to allow, and do you think that it should be changed so that there is a limit on how much interest can be allowed on loans?

 

The legal limit should be whatever people will agree to.

 

What do you think, personally?

 

If I do a 100 year, interest only loan......

If you want someone to loan money, interest has to take into account inflation, the lost opportunity cost if the money was invested elsewhere, and the cost for bad debt (if one out of ten high risk loans get paid off, it has to cover the loans that defaulted - which is why pay day / pawn shop loans charge so much interest).

Why would anyone loan money at a loss?

 

Because one high risk person doesn't think they should have to pay for other high risk people, let alone their own debts, would be my guess.

People simply do not understand or appreciate the time-value of money.

 

No. What is immoral is trying to use force to stop people from freely entering into transactions they willingly agreed to.

 

Well, it depends on prevailing interest rates, and how much I need the loan.

 

There are protective regulation on interests and loan arrangments. But interest is dictated in part by the risk involved. Higher risk loans will have higher interest because a larger proportion of that market may not pay back the loan and disappear (Payday loans for instance). The company supplying the high-risk loans has to make a profit and will set the interest to what their market will agree too.

Some people have good credit---and thus are low risk--and a financial entity will set the interest less for them because again---that entity can make a profit on that arrangement with that particular market. If they raised rates---those good credit people will go somewhere else.

There are regulations but a market based system gives almost all people opportunity to participate.

 

But there are all sorts of laws that already do that, purely based on moral sentiment. But they serve the function of protecting the public from the widespread corruption and extortion that would have happened if they weren't in place. Things like minimum wage, which keep employers from paying their workers a dollar to clean skyscrapers, etc. Or things like statutory rape, where the young child and the older person may perfectly consent to the practice, but our society rules it against the law.

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Why should a single investor have to pay off the risks of the business, entire?

 

I'm with Perdidochas on this one. People should be able to charge whatever the borrower is willing to pay. Your typical mortgage costs 2-3 times the amount of principle borrowed. A $100000 home mortgage will cost $250k-$300k to repay. That sounds like a lot, but the mortgage company just handed you $100000 and will not be able to make money using that $100000 for 30 years. They will not loan money out as a favor if they cannot make money from it some how.

Would you loan somebody $100000 for a 1% interest rate return over 30 years? I might to a friend or family member, but not as a business investment.

 

Those are fairy tales. The government is by far the most corrupt and violent group in society. Thinking they protect us is like looking to your rapist for protection.

 

True enough. My intention was just to point out that free people doesn't necessarily mean "fair people". Without any restraints, this world would be a whole lot darker than what it is now.

 

Have you seen the effective interest rate pawn shop charge? That loan is secured by property, the loan amount low enough that the property can be easily sold at a profit - no risk.

 

I am old enough to remember when state law (in my state) prohibited usury and limited the interest rates that could be legally charged. There has never been a federal law against usury, to the best of my knowledge, and I'm not aware of any states that currently enforce usury laws.

 

By saying there should be a limit on interest you're saying that the party giving the loan does not own their property. If not, then let them interact with others in voluntary transactions. If so, take their property - limits on interest are wholly inadequate. Either way, a limit on interest is not justified.

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Well, not really. It's more like looking to the mafia that forces you to pay them protection money for protection. They might do a good job, that's beside the point.

 

Their property would be the principal which is loaned out. The interest does not exist as a property.

 

Person A can promise person B $120 tomorrow in exchange for $100 today. That's a perfectly voluntary transaction. That's what I'm defending, not the current financial system, which is about as far from ideal as is possible under a system where wealth is in private hands.

 

Well, now that I think about it, I guess there's no good answer. On the one hand, you'd be stopping one crime, but on the other, you let the government intervene in what should be a basic right. There have been both petty and huge examples of the sorts of scams operated by mutual consent (like the Panzi Scheme), but I suppose it is better that some people have the liberty to fail rather than have their liberty restricted.

 

GSE loans (government backed such as FannieMae or FHA) have interest rates set on what the FED prognosticates as the future rate of inflation. These are bank rates only but have an overwhelming influence on mortgage loans. The rates can change every time the FED meets to discuss the issue of future inflation.

This adjustable GSE rate is meant to curb runaway inflation which we are more exposed to because we have fiat money.

 

If most house loans and bank loans are either backed by government or subsidized by government, then why not nationalize this part of banking? Let government determine the interest rate on all loans using government backed/funded loans? If a lender uses 100% of their own money for loans, then let them charge any rate they wish.

I think it's BS for a lender today to use government money for loans, basically free money, to set the interest expense rate at 4-10%, yet only pay 0-1% interest income on cash deposits?

 

"Compound interest over time" is at the heart and core of the problem with the USA and Canadian economy but it is shocking how seldom this phrase, in high school level English is used even in this forum?!

https://www.michaeljournal.org/articles/social-credit/item/the-public-debt-problem

 

Never did like loan sharks...

 

In theory.......
here in Canada it should be possible to figure out a balance between the creation of debt by the private banks vs the creation of debt (money) by the Bank of Canada that is owned by all Canadians.

When those two numbers are equal... then a similar amount of money is being put into the economy as is being taken out of the economy through the piling up of compound interest over time.

Loan sharks though...... because nothing goes on the books.... they really could mess up the whole formula?!

https://www.michaeljournal.org/articles/social-credit/item/the-public-debt-problem

 

Compound interest is the same as multiple lots of simple interest. You cannot outlaw compound interest without outlawing simple interest.

 

“the most powerful force in the universe is compound interest.”Albert Einstein