Tuesday, January 28, 2014

Interest: Then & Now

Note: The following post was written for the 401J blog (http://401j.wordpress.com/) but I thought it would be worthwhile to post again here:  

“If you lend money to My people, to the poor among you, do not act toward them as a creditor; exact no interest from them.  If you take your neighbor’s garment in pledge, you must return int to him before the sun sets; it is his only clothing, the sole covering for his skin.  In what else shall he sleep?  Therefore, if he cries out to Me, I will pay heed, for I am compassionate.”  (Exodus 22:24-6)

Interest rates affect all of us in some way or another.  Recently, historically low interest rates induced me and my wife to end the days of renting and bite the proverbial bullet by purchasing our first home in Pawtucket, Rhode Island, for example.  In our society, it’s basically a given that it’s got to cost something to borrow money now, and we’re more than happy to accept that.  We considered the interest rate we received on our mortgage a steal.

True, many interest rates are fairly low and quite reasonable.  Education and housing, for example, are two areas where interest rates remain fairly low for a variety of reasons.  In other areas though, rates are high bordering on predatory, and can often cause financial stress that turns into crisis as quickly and surprisingly as flames can spread.  Notoriously, credit card debt causes problems for many.  It’s easy to charge things, much harder to pay and keep track of what’s been spent. Then, rates well over twenty or even thirty percent kick in, greatly increasing the burden.

In particular, Payday loans have served as a predatory means for crippling those in need, particularly here in Rhode Island.  First, the basics.  A Payday loan is a small loan that is supposed to be paid off the next time a person receives their paycheck.  The intent is to help those who are having a tough time paying bills but should be able to do so as soon as their next paycheck comes.  This advances the money to a person’s bank account now, assuming they’ll pay off in a few weeks when the paycheck comes in.  The only requirement to qualify for the loan is usually evidence of regular employment and a paycheck on the way.

Now, the abusive part.  These seemingly helpful loans have enormous interest rates.  In Rhode Island, the cap is 260% annually, which is not uncommonly charged.  Further, most people who apply for Payday loans don’t have access to other lower interest loans because of poor credit or limited resources.  Default on these loans is not uncommon, and a small loan for $100 or less can turn into thousands of dollars or more in the blink of an eye.  Many states have legislation to limit these usurious interest rates, and advocates in RI are making a legislative push for a cap at 36%.

As quoted above, the Torah places a categorical prohibition on charging interest to fellow kinsmen in order to assist those in need without penalizing them.  I always assumed, though, that this idealistic law was first promulgated in a society where interest wasn’t common.  Therefore, it was essentially a nice law though better applied in a totally different economic climate.  Wrong.  I recently learned that interest rates were regularly between 20 (the Sumerian rate) and 50% in the ancient near east, and that high interest rates were ubiquitous.  Israel was the notable exception in a climate of predatory lending.  All the more, this serves as a stark reminder of the Torah’s radical message of assistance those in need for their sake rather with a meaningful prohibition on profiting from that assistance.  

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