Wednesday, 7 November 2012

Interest and Usuary

Interest and Usuary

Here is an idea which, in my ignorance, I believe to be original. For decades I have wondered at the problem of distinguishing between Interest and Usuary. Ever since Sunday School I have understood that usuary is a sin, a position that Christianity maintained till the renaissance; till 1545 in fact, in the English-speaking world [1]. And it is a position maintained still by some sects and by our Islamic neighbours. But the taking of interest on lent money (as we happily do every day of our lives) is usuary, so where is the sin? Taking to much, perhaps?

It is a commonplace that high interest rates are regarded as justified if there is a high risk of default. But it has always seemed to me that, as the principal is paid back so the risk declines. Once the borrower has paid back a sum equal to the amount initially borrowed, the risk becomes zero. Not only does the present risk become zero (so higher rates of interest cease to be justified); the previous high rate of interest become unjustified as well (though initially justified). Current lending contracts are not framed in this way. Currently the lender sets a rate which remains in force even when the principal is repaid. In such a case, only Shylock would demand the letter of the 'bond', and call it justice.

So here is the idea. All interest in Britain should be fixed at bank rate, or (if you like) at 2% above bank rate. Anything above that must be regarded as repayment of capital. It is perfectly OK for a credit card company to demand repayment at the rate of 20% per annum, or 30% per annum if it likes, but when it has got its money back there is nothing more to pay, except the interest on the loan for the duration of the loan.

Suppose you borrow £100 at 20% (as on a credit card). If you pay nothing for 4 years, by compound interest your debt will have doubled. So pay £20 per year for 5 years. At that stage you will have paid £100, but the lender will say that you still owe £100, because you have only been paying the 'interest'. So instead you pay £30 per annum. It will take you 14 years to pay down your debt, and you will have paid a total of £420. That (I submit) is not interest but usuary. Were the rate set at 20% because of RISK (when bank rate is 0.5%), I argue that 5 payments of £20 should suffice to bring the risk down to zero, and therefore interest rate (for the whole period) down to something more like 2.5%. A further payment at that stage of £12.5 would suffice to settle the interest due (on £100 for 5 years at 2.5% p.a.).

A bank offering these terms would make less money, but would probably have plenty customers. Maybe this resembles Islamic banking practice.

L. Cawstein
cawstein@gmail.com

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