I’ll say it upfront that I’m not very knowledgeable about the financial industry. But if you sign a mortgage for $600K, and then you are expected to pay interest greater than the rate of inflation on top of that, how is this not usury (as understood by Catholic teaching)?
Here’s a really long explanation:
I believe it has to do with taking unfair advantage at the expense of a person’s necessity. I don’t think you’d find many people that would agree that a $600K home is a “necessity”.
At least one Bible translation seems to show a distinction between “interest” and “usury”. But usury does not appear in all translations, nor did I find it in the Catechism.
Anyone who lends money has to charge an interest rate “greater than the rate of inflation,” or else money would be free.
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.)
I suppose “delay in returning what was lent” could apply…if someone doesn’t pay for the house then there could be the annoying process of foreclosing…although don’t they still get compensated for doing that anyway?
Maybe I shouldn’t spend too much time looking into things like this. :o
I wouldnt. Depends entirely on location.
But, I guess the same claim could be made of anyone not living in a tent, a shelter, or on the street.
Im not saying its true in your case, but i have found that many people often make such claims when they feel deprived of what they feel they deserve. I think in those cases it’s a matter of battling with a lack of humility.
The Church defines usury like this:
[quote=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.
Think of it this way: a usurious transaction is essentially one where one party is made better off at the expense of the other party being made worse off–it is unjust. This is why the lender can charge interest for his risk, expense (including opportunity cost), and work, since these things make him worse off. He is entitled to at least “break even.” He can also charge interest for a loan that produces something, since the borrower is being made better off by the loan.
I found this:
When I finance the purchase of a home, the bank is a co-owner of the house with me. By paying principal, I am slowly, bit by bit, buying the house from them. By paying interest, I am paying them rent for my use of that portion of the house which they own. This is not usury and therefore not illegal.
Based on some interesting older books I’ve read, I used to look at usury very literally – as any interest charged beyond the rate of inflation. But then I realized that the interest I pay for most everything is just the cost of the service that I want. Lenders are doing me a favor by allowing me to buy something before I have the money to do so. There is no way that this service could or should be free of charge.
I don’t think there’s a magical number, but it seems like a lender ought to be morally just in charging whatever interest rates are necessary to make a profit sufficient to sustain their business.
Zippy Catholic is a blogger who has written extensively about usury and its place in Catholic theology vs its occurrence in modern finance. He has dug quite a bit into the Magisterium along with the writings of St Thomas Aquinas on the subject.
Zippy’s (and Aquinas’) take is that there are essentially two kinds of loans: those that put the borrower on the hook for the return of the principal to the lender (called “mutuum” loans; aka “full recourse” loans in modern times) and those in which the lender’s recovery is limited to the property used as collateral (called “societas”; aka “non recourse” loans). Aquinas (and Zippy) draw this distinction between these types of loans; to them, charging profitable interest on a mutuum (full recourse) loan is always usurious, never morally licit while charging interest on a societas (non recourse) loan is not necessarily so.
I won’t go into a full discussion here. Instead I’ll refer CAF readers to Zippy’s excellent Usury FAQ here. The FAQ gives a few examples of what is or might be usurious lending to clarify the points Zippy is making. If that FAQ whets your appetite for more, you can check out Zippy’s extensive archive of usury articles here. I have no idea if Zippy Catholic is a member of CAF (maybe under another name?), but I credit him for adding to my understanding of usury and I think his writings are an excellent resource for the discerning Catholic interested in viewing the modern finance environment in the context of Catholic teaching.
Thanks for the Zippy references. I must admit that I’m still a little confused. What categories do home and auto loans fall into? Since an asset is associated with those loans, they’re not full-recourse loans, correct? So it’s primarily loans that aren’t tied to a specific asset - where someone borrows money for some general purpose that usury becomes an issue?
Recourse has to do with whether or not the lender is limited to the property in question for recovery of the principal should the borrower fall into default.
Most mortgages are typically non-recourse, meaning the lender’s recovery is limited to the encumbered property and does not extend to the borrower himself. This is the major reason why lenders typically do not lend more than 80% of the value of the property in the case of residential mortgages. Further, the lender, to protect itself further, typically require the borrower to carry adequate insurance. So mortgage interest is generally not usurious.
Car loans are typically full recourse meaning that the lender can go after the individual borrower if the compensation from recovery of the vehicle falls short of the principal. Again, lenders usually require borrowers to carry comprehensive and collision insurance on top of the basic liability policy. So interest on these loans are considered usurious.
By the same standard, all credit card debt insurance is usurious because there is no property secured that the lender can attach, hence the lender must necessarily come after the borrower personally. Same deal with student loans.
Zippy draws a distinction between persons and companies as borrowers, meaning since it’s the assets of the company that are at risk instead of a person’s assets, loans that would be usurious to an individual borrower are sometimes okay when made to a business.
Thanks for taking the time to explain further. I suppose it’s just my cultural experience, but it seems foreign to me to consider auto or educational loans as usurious. If these lenders made no profit, they wouldn’t exist, and most folks are happy to pay a small amount of interest to have something sooner than they otherwise could. Whether or not an auto loan is prudent is a different discussion, but it just doesn’t “feel” usurious. And I say that jokingly because my feelings on the issue aren’t relevant.
Definitely something to give more thought to. Thanks again for the education.
I have a hard time making sense of what he’s saying. His first premise is that usury is “interest charged on a mutuum (personally guaranteed by the borrower) loan”. What does “personally guaranteed by the borrower” mean? And then the Catholic Encyclopedia says a mutuum is the “loan of things meant for immediate consumption”. So is that what he means?
And then (maybe this is a little too specific… I just sort of skimmed it and came across this) Q36…I’m confused. He says, “However, if the contract says that the borrower owes (say) $5000 if the car is destroyed, and that he is personally on the hook to pay interest on the $5000 if he can’t pay it all at once, then that is usury.” I’m wondering why that would be usurious…interest can’t be charged merely because there is a loan, true. But there are extrinsic reasons to charge loans, and I wonder to what extent he took those into consideration. In this case, there is a delay of payment on the part of the borrower, so isn’t that a legitimate extrinsic reason for exacting a penalty or interest?
Zippy also says in Q45 that inflation can’t be a reason to charge interest, which I also am confused about since inflation depreciates the currency; what was previously lent is now less valuable, so I’m confused about why that wouldn’t be a valid reason to charge interest.
Then Zippy dismisses the Catholic Encyclopedia…but the CE has both the imprimatur and the nihil obstat. John Hardon’s reading of this issue seems to mirror the CE, and the Modern Catholic Dictionary also has the imprimatur and nihil obstat. (And it’s not like John Hardon, SJ ever had a reputation of being anything but faithful to the faith of the Church.) I didn’t see Zippy having either one, which makes his interpretation much less credible. Yes there is never a reason intrinsic to the loan that justifies interest, but there are extrinsic reasons that can justify interest and (based on the sources I’ve found) are pretty much always assumed to exist today so long as the interest is not excessive.
Scripture, the Fathers of the Church, the decrees of councils and popes condemn the taking of interest on loans to the poor and the greed of usurers, but said nothing about the charging of interest in general.
However, Deuteronomy 23:20: “You may charge interest to a foreigner,” indicating that interest-taking is not presented as inherently evil or sinful. The larger ethical issue of the morality of interest-taking is not addressed in the Old Testament. Rather, interest was viewed only as a problem of social justice. The problem of commutative justice, i.e., of equivalence of value in an exchange of present for future goods, remained quite untouched (Thomas F. Divine, S.J., Interest, 10).
With free enterprise, as developed by the Late Scholastics, the Church defined what is meant by usury. Session X of the Fifth Lateran Council (1515) gave its exact meaning: “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.”
Consequently, as loaning money did involve loss of profit to the lender and further risk of loss from delay in returning the money loaned, this did justify interest that is just and justifiable. Since a lender does lose the benefits from interest. or use of his money in other ways, that’s precisely what makes the charging of interest legitimate and worthy – he has expense and risk – a great Lateran Council understanding of the use of money.
The Franciscan St. Bernardine of Siena (1380-1444) was perhaps the first theologian to recognize that time of use had an economic value and, at least in certain cases, might be licitly compensated. St. Antoninus (1389-1459), a Dominican of Florence, seems to have questioned whether Aristotle was correct in saying that money is naturally sterile. Money alone, he said, is sterile, but, combined with knowledge and enterprise, it is fruitful. His Summa Moralis examined commerce and banking, and prepared the way for modern notions of interest, which generally regard proper returns on loans taken with just title as fair.
Today, the term “usury” is usually reserved for taking excessive (i.e., unusually high for the economic conditions) interest on a loan because of someone’s circumstances: The greed of the lender takes unjust advantage of the weakness or ignorance of the borrower. [See *Encyclopedia of Catholic Doctrine, Our Sunday Visitor].
**When I finance the purchase of a home, the bank is a co-owner of the house with me. By paying principal, I am slowly, bit by bit, buying the house from them. By paying interest, I am paying them rent for my use of that portion of the house which they own. This is not usury and therefore not illegal. **
Im not sure about that, Back when I was married, my wife and I bought a house, the value was around mid $90s, our monthly payment was $780. on a 30 yr mortgage…if we had made every payment, we would have ended up paying $280,000. for a $90K house…???
I realize some amount of usury is needed, but 3 times the value of the house?
That seems a bit excessive to me. But to clarify, usury is never needed as usury is always wrong. Usury as distinguished from interest.