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When does interest become usury?

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“Usury humiliates and kills,” Pope Francis recently told the John Paul II Anti-Usury Non Profit Association in Italy. “Usury is a grave sin. It kills life, stomps on human dignity, promotes corruption, and sets up obstacles to the common good.”

Catholic social teaching condemns usury, yet many would be at a loss to define the term. Distinguishing it from charging interest on a loan often devolves into the vaguest generalities.

Philip Booth – a professor of finance, public policy, and ethics at the largest Catholic university in the UK (St. Mary’s University, Twickenham) – helps readers delineate the ethical difference between charging interest and demanding usury in his latest essay for the Acton Institute’s Religion & Liberty Transatlantic website.

Booth, a senior academic fellow at the Institute of Economic Affairs (IEA), begins with perhaps the most controversial lending arrangement:

Consider a payday loan. Such loans are typically small and are repaid over a short period of time. When their interest rates are “annualised” – calculated as if the loan were rolled over on the same terms, month after month, for a whole year – incredible rates of interest are quoted. However, it is, in fact, easy to reach a large figure for the interest rate without any substantial profit being made, simply because of the nature of the transaction.

For example, imagine a loan of £100 for two weeks, which involved an administration cost of only £5 and where this was the only cost passed on to the customer (with no allowance for interest, profit, or risk of non-repayment). The annual effective rate of interest on such a loan would be more than 250 per cent.

“Comparing the cost of a short-term loan with longer-term alternatives is like comparing the cost of renting a hotel room at a nightly rate for 365 nights with renting a house for a year,” he writes.

Booth goes on to explore the ethics of lending, the unintended consequences of anti-usury laws, and a brief comparison with Islamic money-lending practices.

Read Philip Booth’s full essay here.

(Photo credit: Anthony Easton. This photo has been cropped. CC BY 2.0.)

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Rev. Ben Johnson Rev. Ben Johnson is Senior Editor at the Acton Institute.