I’ve been thinking a lot about debt and credit/loans lately, and this has been toiling in my brain and I absolutely must hear people’s thoughts on it.
Could a society which doesn’t allow the lending of money at interest theoretically exist?
Before you jump and say, “but so many people rely on interest as the only way to make money! Banks! Credit card companies! That’s how I make my money”, remember we are talking about a pretty dramatic restructuring of society here. It’s theoretical.
I know for many of us in real, everyday terms this would mean things like: it would be impossible for us to buy a house, a car, etc… but what if those who sold houses simply allowed them to be paid in installments, without the mortgage and accompanying interest? They would still operate similar to anyone who lends money: the person’s credit history would have to be scrutinized, and if they didn’t pay after a while they could repossess the property.
I know interest is like a reward for taking that risk of lending somebody money… and because of that there would be a lot less lending of money in general. How would this affect the distribution of wealth? I could theorize it would make it much more equal, but I could also see it skewing completely to the other end and making it more concentrated in a select few even than it is now.
Gee, I just don’t know. What do you think? Is it even possible, and if it is possible, could it actually be good?
I’m sure that there would be enough user fees to make up for the lack of interest charges.
I have a prepaid Mastercard. I load money on it and then use it. There are no interest charges levied or paid on this money. Instead, thereès a charge to buy the card, a charge per month to use it, a charge to load money on it, big charges if you overdraw it, a charge to use it, etc, etc. Still cheaper than interest rates on credit, though.
The Muslim world has been acting this way for centuries. Interest is explicitly forbidden.
A lot of what I’ve seen looks like operations with interest in which the “interest” lurks under disguised names, but maybe that’s just me. Interest, after all, isn’t just some reward that evil moneylenders rip off from us - it’s the “rent” you pay to use someone else’s money for a while. If you don’t pay interest on it, then the lender gets nothing for his efforts. That’s the problem with Rigmarole’s suggestion – there’s no problem with paying in installments, but ithe loaner only gets back precisely what he puts in, why shuld he even bother? What’s in it for him?
In the Muslim world , in place of loans with interest, I understand that there are schemes in which the “lender” and the “lendee” form a partnership in which thety share assets (letting the “lerndee” get the money he needs at firast, then letting the lender get his loan back, plus whatever extra has accrued.)
I think that the thing that sends person after person over the cliff (including myself, five years ago) isn’t interest, per se; it’s compound interest. If it was forbidden to add interest to principal, and charge new interest on the sum, credit cards and such would be a lot cheaper.
To answer one question, “What’s the benefit for the lender?”: He gets to live in a society which is improved by the re-application of capital. If I lend someone a million pounds interest-free to market and distribute a better mousetrap, I get only my million pounds back, but as a side benefit, there are now cheap better mousetraps in the shops, and the chances are I will want one or at least be better off as the general mouse menace is brought under control.
It would, at best, come out the same. At worst it would be worst? Here’s why:
Money today has more value than money tommorow. Whioch means that if interest vanishes, all the people who would normally sell a house at “X” number of dollars will increase their prices drastically. Why? Because they won’t be getting X immediately anymore. If they charged only X with no interest, they’d get less money because of inflation, as well as the lost opportunity to invest the profits. So they’ll just charge people more money to make up the difference.
From the consumer’s standpoint, it really won’t be a good thing. At best they’d break even. But it’s likely to simply make the end amount they pay higher. Why? Simple: a house-seller doesn’t have nearly the wide-spread financial resources and services a bank does. Those things enable a bank to spread risk. A house-seller has far fewer resources and those are more focused. A bad fire, a run of local layoffs - all these things will hurt local house-sellers much more than a bank. To cover that risk, prices rise.
In times past, Christianity forbid usury. As thorght and practice developed, monks themselves realized that in fact they were doing no one any good, and actually began lending at reasonable rates themselves. Spare money kept in the back-room can’t help anyone.
In the even that ths kind of thing happened (no interest), I’d predict a huge surge in renting and much smaller houses.
No, he gets to live in a society in which the flow of capital stops, and in which only the people who already have money will be immeasurably better off than those who don’t.
The best case scenario is that rather than borrowing money at interest, lenders will begin taking ownership of your things in exchange for lending you money. You won’t be able to get a loan to start a business - instead you’ll have to go to a venture capitalist and convince them to give you money in exchange for part ownership of your business.
This means more control by rich people, less entrepreneurship, and a stagnant economy. Bad, bad, bad.
And if you don’t lend the money, you avoid the risk that you will never get paid back. And if you keep the money, you can put it to work for by investing in stocks and getting a 7% return on it. So it’s not zero-sum for the lender.
Under a no-interest system, anyone who lends money is actually giving money away. Therefore, unless other mechanisms arise to reward lending, it simply won’t happen. And the ability to borrow capital is integral to our economic success.
Interest is a good thing. It’s the mechanism by which people with money are compensated for spreading it around to places where it can be used more effectively.
So how do banks in the Muslim world function? if compound interest is forbidden, how do they float bonds, sell mortgages, notes, etc.? Or do they just charge interest, but call it a different name? I guess that must make it all right!
I know this is off topic a bit, but I have to ask - why would you pay all these fees when you can just use a debit card for free (if you don’t want to just use a credit card and pay the balance every month)?
Perhaps you misunderstood my answer, possibly wilfully, possibly not. The question I was seeking to answer was why anyone would lend money at zero interest, whereas you are assuming that nobody would - and so we are at cross purposes.
Ah, the 7% return… so in our hypothetical society where there is no lending money at interest, it’s still possible to get interest on your money. Again we seem to be at cross-purposes. I wasn’t arguing that a zero-interest society was a Good Thing - just that the lender stands to reap benefits other than directly financial ones.
Sam’s not referring to interest in his example - he expressly says investment in stocks. Dividends on stocks are not interest - they are a distribution of profits to the owners of the corporation, after payment of operating expenses.
That’s a little too abstract for most people. The capital the I have accumulated is being used to improve society in general. Does everyone accumulate surplus capital to be used this way and if not, why should I do that?
Maybe the supplier of capital could be given a part ownership in the enterprise rather than interest on a loan. A share in the profit would take the place of interest. Of course if there is no profit there is no share, but if there is no profit the lender doesn’t stand much chance of collecting interest either.
First, I feel obliged to point out that of course a society without interest loans can exist; society predated interest loans. Now, on to the question of wether a reasonably modern society can exist without interest loans.
I suspect it could. There would be some changes, of course; houses would tend to start smaller and be designed to be expanded in increments (perhaps via modular construction); rent-to-own would probably get a shot in the arm, and people would have to live within their means. Banks would be socialized and/or subsidized, to ensure their non-lending functions continued. A market for small-business stock offerings would probably emerge, with a reemergence of dividends to attract buyers. Lending on equity might begin to occur, in ‘need the money or die’ situations, or perhaps more commonly than that. The lack of a US national debt would force us to finally balance the budget, one way or another, and many of the governent programs that involve interest loans now would simply carry on without interest (student loans, for example).
And so on and so on. One thing you can be sure of, though, is that humanity isn’t going to let society roll over and die just because you retard lending.
I’m anything but an expert on the subject, but here’s one mortgage scheme being floated by HSBC: “Under the new scheme, the bank will buy the property outright on the customer’s behalf and lease it back to them for an agreed term, usually 25 years, the same period as a traditional mortgage. The customer will make monthly payments made up of rent and contributions towards the purchase price.” As I said, it’s a shell game. The “rent” in this case is what you and I would call “interest.”
It seems like commercial investment could still be possible (since a bank/VC would still be able to become an owner/stockholder and then, once the business was profitable, would be able to continually reap a share of the profits), but noncommercial investment (home and auto loans, for example) seems unlikely, since the lender would have nothing to show for it afterwards.
How about if you have the government give tax benefits to lenders (a percentage deduction/credit based on the amount they have lent out)? Sort of back-door interest.
There is such a thing as rent-to-own, though. If I’m renting a $24000 house at $500 a month, and the owner offers to sell it to me on layaway for 120 payments of an additional $200 a month over the top of my rent, then I’m not paying any interest. (The original owner retains the title until I’ve paid up, like any other layaway, of course.)
It all comes down to how much things are worth…and the value of a rental is subjective. The intent may be to provide the same options as a home loan, but you can definitely do it without paying interest.
While debit cards are extremely common in Canada, they are not branded with MasterCard or Visa logos and work on a completely-different system, Interac. Until very recently, there was no way to use a Canadian debit card for online purchases. (Interac is introducing its Interac Online service to merchants, but I haven’t seen it in use yet.)
My credit rating is such that I cannot get an actual credit card of my own. This may change soon; I have just finished a five-year effort of paying my way out of debt. Even so, my first real credit card may be a secured credit card.
Until PayPal appeared in Canada and could be configured to withcrow from a Canadian bank account, I was essentially unable to order things across the net. I had to ask my friend to use his credit card, and email him the money (another Interac service).
Several vendors (MoneyMart, MyCard) have introduced prepaid MasterCards to Canada in the past few months. There is also a prepaid Visa card, aimed at travellers, available from the Canadian Automobile Association.
Given the choice between a prepaid MasterCard with its assorted fees, and a secured Mastercard with most of the same fees, I chose the prepaid card. At least then, my money won’t be tied up as security.