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Re: the personal vs. institutional cap question - the first thing to leap to mind was loan sharks. Loan sharks should be capped - possibly loan sharks should be considered institutions? But, I also think that a person-to-person loan where there is no criminal organization involved should have somewhat greater leeway. I'm not certain how much, but not a lot.
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more precisely on the last question: i know that there are some laws in effect here, but i don't know enough specifics to answer any way other than "i don't know". i do know that the "payday loan" places were until recently exempt from the usury laws, though. (we had a ballot measure to change that in november; i don't know when it takes effect.)
According to some quick reading I've done this evening, Ohio has a 21% interest rate cap - loans with higher interest rates cannot be pursued legally in Ohio, *unless* the bank issuing the loan is not located in Ohio and only the borrower is (i.e. most credit card companies), or the lending institution is exempt from usury laws according to the federal law I mentioned that went into effect in 1980.
So you're defining loan sharks as people who charge really high interest, or as people who have some sort of criminal leverage against the borrower (such as blackmail, threats of violence, etc)? I'm not sure what distinction you're making. Are you saying that as long as it's only an individual with no connections or previous history in lending, they shouldn't be capped, but if they make a practice of it they in effect make of themselves an institution?
I'm not sure how to answer the interpersonal loan question. If I make a loan to a friend, I don't expect the government to stick its nose into my business. On the other hand, loan sharks are a problem.
I don't actually know the law in the last question, though I always thought that the reason so many credit cards were based out of Deleware had to do with Deleware's less strict laws compared to other states.
I don't actually know the law in the last question, though I always thought that the reason so many credit cards were based out of Deleware had to do with Deleware's less strict laws compared to other states.
The last question has checkboxes because more than one answer is right.
According to usurylaw.com (which may or may not be correct), Delaware limits interpersonal oans to 5% above the federal interest rate, but "Banks, savings and loans, and credit unions that are state-chartered are not subject to the usury laws that are on the books in Delaware for other types of person, non-commercial loans. Likewise, loans that are made by federally chartered financial institutions are not subjected to the statutory provisions in Delaware that pertain to usurious interest rates and related lending practices and procedures."
Michigan also has fairly strict interpersonal usury laws, and similar exceptions for state and nationally chartered lending institutions.
According to usurylaw.com (which may or may not be correct), Delaware limits interpersonal oans to 5% above the federal interest rate, but "Banks, savings and loans, and credit unions that are state-chartered are not subject to the usury laws that are on the books in Delaware for other types of person, non-commercial loans. Likewise, loans that are made by federally chartered financial institutions are not subjected to the statutory provisions in Delaware that pertain to usurious interest rates and related lending practices and procedures."
Michigan also has fairly strict interpersonal usury laws, and similar exceptions for state and nationally chartered lending institutions.
If I know you, and I "loan" you money, I do not charge ANY interest. In fact, if I know you well enough to loan you money, I probably won't get too exercised about getting it back either. I've been known to forget people owed me until they pay, and then I get a pleasant surprise.
In a world with a fixed (or relatively steady) rate of inflation, money starts to be worth less as time goes on, so unless you charge (or pay) a friend a rate of interest roughly equivalent to the rate of inflation, you are arguing that you're willing for the lender (in other words, you, it sounds like) to effectively lose money in order to provide the loan.
I find I'm curious as to what is the largest amount of money you've ever dispersed in a "loan" and how long it took someone to pay it back (if they did).
Personally, I definitely distinguish between "this is for you in a pinch, pay me back if you can" loans, and loans that are optional, for which I tend to charge interest.
I find I'm curious as to what is the largest amount of money you've ever dispersed in a "loan" and how long it took someone to pay it back (if they did).
Personally, I definitely distinguish between "this is for you in a pinch, pay me back if you can" loans, and loans that are optional, for which I tend to charge interest.
"At what range do interest rates charged on borrowed funds start to seem excessive to you?"
I don't think this one can have a simple answer; interest rates compensate the lender against the chance of the borrower defaulting, so they have to be viewed in light of the length of the loan, the borrower's history of paying their debts responsibly, whether there's any collateral, and what the current macroeconomic conditions are.
"Do you think governments should have usury laws defining specific limits as to what interest can be charged?"
Interest rate limits are a two-edged sword. Their intent is to keep "predatory" lenders from taking advantage of people who don't know what they're getting into. However, their side-effect is that people who might have only been able to get loans at a rate above the limit will not be able to get loans at all. While this keeps some irresponsible or uneducated people from taking out loans that they would not have been able to afford to pay back, it also makes it harder for those who have tarnished their credit history to get second chances from reputable lenders, which pushes them toward shady dealers where the late fees aren't just monetary.
Given the above, I think it's probably better not to limit interest rates. Having the rates be legal means that there will be more lenders for the borrowers to choose from, which puts them in a stronger bargaining position. However, it's critically important that they be educated enough to shop around for their loans. I also think that it would be appropriate to ban lending clauses that penalize early prepayment, since these serve to lock the borrower in if they later find a better deal.
I don't think this one can have a simple answer; interest rates compensate the lender against the chance of the borrower defaulting, so they have to be viewed in light of the length of the loan, the borrower's history of paying their debts responsibly, whether there's any collateral, and what the current macroeconomic conditions are.
"Do you think governments should have usury laws defining specific limits as to what interest can be charged?"
Interest rate limits are a two-edged sword. Their intent is to keep "predatory" lenders from taking advantage of people who don't know what they're getting into. However, their side-effect is that people who might have only been able to get loans at a rate above the limit will not be able to get loans at all. While this keeps some irresponsible or uneducated people from taking out loans that they would not have been able to afford to pay back, it also makes it harder for those who have tarnished their credit history to get second chances from reputable lenders, which pushes them toward shady dealers where the late fees aren't just monetary.
Given the above, I think it's probably better not to limit interest rates. Having the rates be legal means that there will be more lenders for the borrowers to choose from, which puts them in a stronger bargaining position. However, it's critically important that they be educated enough to shop around for their loans. I also think that it would be appropriate to ban lending clauses that penalize early prepayment, since these serve to lock the borrower in if they later find a better deal.
In Texas, personal loans start getting regulated when they exceed 10%.
Do you have a reference for that? That's not what it says at usurylaw.com (http://www.usurylaw.com/state/texas.php) and I've been wondering if that site is accurate or full of hot air.
I agree with you with regard to prepayment penalty clauses past a reasonable minimum processing time to keep paperwork/processing costs down (reasonable to me is 2 or 3 months).
I have to admit, I wonder if there's not an interest rate that actually raises the chance that someone will default on a loan, i.e. "take the money and run" rather than pay such an expensive loan back.
But, seriously, you don't have a problem with it if someone is charging 45-75% interest on a loan?
I have to admit, I wonder if there's not an interest rate that actually raises the chance that someone will default on a loan, i.e. "take the money and run" rather than pay such an expensive loan back.
But, seriously, you don't have a problem with it if someone is charging 45-75% interest on a loan?
Though when we make loans to friends in a personal, we also don't charge interest as a rule. (It's different in a business context, obviously.)
It might seem gauche, but I always charge interest on any loan over a modest size, even to friends. This is because I've found that even if the loan is nominally interest-free, as long as it goes unpaid, it extracts an implicit cost in guilt, social tension, and/or feelings of obligation, and I don't think that there's anything either person can say to truly eliminate that cost. Charging interest makes it a business arrangement, where everything is neat and above-board.
nodnod. I think a big part of that implicit emotional cost is a recognition of the opportunity cost imposed on the lender.
I am, as a very broad idealist principle, opposed to the notion of usury. In practice, I understand that it has its place as a hedge against inflation, as a form of service charge, and as a way of balancing the costs of 'eating' unpaid loans. With all of that in mind, there isn't a specific interest rate that I can point to as usurious. I tend to step back and look at the whole picture: what is the total interest paid in relation to the value of the initial loan, and how does that interact with a borrower's ability to ultimately pay back the loan-plus-interest? A smallish loan that a borrower is expected to be able to pay off quickly, even if interest accrues, could legitimately bear a higher interest rate than a longer-term loan of large value that a borrower isn't expected to pay off quickly.
A 30% interest charge that is understood by all parties to be deliberately punitive of late payment might be acceptable, if the borrower has >95% confidence of paying off the loan before the interest kicks in.
OTOH, even at 5% per annum, the total interest charged on a standard home loan comes to about half of the initial value of the loan. This I consider... morally questionable.
So, my real-world attitudes are shaped by those two extreme examples. Note that both are examples of commonplace rates: credit cards and home loans. One is tempered by the fact that a significant percentage of people carry forward balances on their credit cards; the other is tempered by the fact that it is one of the commonest mechanisms leading to home ownership in US-American culture.
No definite answers, but perhaps some food for thought...
A 30% interest charge that is understood by all parties to be deliberately punitive of late payment might be acceptable, if the borrower has >95% confidence of paying off the loan before the interest kicks in.
OTOH, even at 5% per annum, the total interest charged on a standard home loan comes to about half of the initial value of the loan. This I consider... morally questionable.
So, my real-world attitudes are shaped by those two extreme examples. Note that both are examples of commonplace rates: credit cards and home loans. One is tempered by the fact that a significant percentage of people carry forward balances on their credit cards; the other is tempered by the fact that it is one of the commonest mechanisms leading to home ownership in US-American culture.
No definite answers, but perhaps some food for thought...
Ummm... how much?.... ummmm... I'm thinking a bit over two thousand. We had it, they needed it, we "loaned" it to them. I'm pretty sure they paid it back... but don't recall. As I said, I don't worry too much about it. If you're my friend, I don't keep score.
I don't make commercial type loans, "optional loans", to friends. If they can't get the money from a bank or something, I guess they can wait for whatever it is, eh? (Wide screen TV? FAGEDABOUDIT!)
In a pinch loans? I don't make them either. That's what I'd consider relatively small amounts - $200 or $300 or so. I just GIVE them the money and tell them not to worry about paying it back. Some folks I just tell 'em to "pay it forward." But most "in a pinch" loans or situations would fall under the umbrella of the "you're my friend - and you need this." (I mean - what good are friends if you can't mooch off them once in a while?)
It also depends on how they approach me. If they ask for a loan, well, that's what it is. If they ask for help, same story - that's what it is.
And lest some Smart-azz think I'm made of money - NOT! God has always provided what I need so I've never worried about it. My wants sometimes get pinched off - but the NEEDs have always been taken care of. And sometimes that need was filled via couch-diving for the kid's milk money, but it gets filled! :-D
I don't make commercial type loans, "optional loans", to friends. If they can't get the money from a bank or something, I guess they can wait for whatever it is, eh? (Wide screen TV? FAGEDABOUDIT!)
In a pinch loans? I don't make them either. That's what I'd consider relatively small amounts - $200 or $300 or so. I just GIVE them the money and tell them not to worry about paying it back. Some folks I just tell 'em to "pay it forward." But most "in a pinch" loans or situations would fall under the umbrella of the "you're my friend - and you need this." (I mean - what good are friends if you can't mooch off them once in a while?)
It also depends on how they approach me. If they ask for a loan, well, that's what it is. If they ask for help, same story - that's what it is.
And lest some Smart-azz think I'm made of money - NOT! God has always provided what I need so I've never worried about it. My wants sometimes get pinched off - but the NEEDs have always been taken care of. And sometimes that need was filled via couch-diving for the kid's milk money, but it gets filled! :-D
At my blog page: http://wherestheinterest.com/2009/02/01/minn-ag-sues-allina-for-violating-state-usury-laws/, I talk about what is usury. Or rather, if we think of usury as "high" interest rates, the rate doesn't really matter.
From my blog:
"Let’s crunch some numbers. Say you have $10,000 in medical debt at 8% interest and you agree to pay this off in 10 years. You’ll pay $4559.31 in interest over that time. Now, how about we change the terms to 18% interest for 4 1/2 years. The amount of interest paid will be $4661.75.
So, is the amount of the interest rate really the problem? Sure, the payment will be larger for the shorter term, higher interest rate loan, but does that really mean that 18% is that much worse or more usurious then 8%? No."
And as for the other discussion on the value of interest rates, I invite you to watch a few videos on my blog. While you're at it. Learn how your money is all based on debt, or rather just the principal amount of this debt, and you'll begin to ask, "Where's the Interest?"
http://www.wherestheinterest.com
From my blog:
"Let’s crunch some numbers. Say you have $10,000 in medical debt at 8% interest and you agree to pay this off in 10 years. You’ll pay $4559.31 in interest over that time. Now, how about we change the terms to 18% interest for 4 1/2 years. The amount of interest paid will be $4661.75.
So, is the amount of the interest rate really the problem? Sure, the payment will be larger for the shorter term, higher interest rate loan, but does that really mean that 18% is that much worse or more usurious then 8%? No."
And as for the other discussion on the value of interest rates, I invite you to watch a few videos on my blog. While you're at it. Learn how your money is all based on debt, or rather just the principal amount of this debt, and you'll begin to ask, "Where's the Interest?"
http://www.wherestheinterest.com
Sure, the interest total on a home mortgage is huge -- but that's also over 20-30 years! Not having the money for 20 years is worth something; people wouldn't do it if they didn't get something for it.
There should be a time limit on prepayment penalties, perhaps as a function of the loan's length (so a 1-year loan might have a 1-month limit, but a 30-year mortgage could have 2 years). (Otherwise, the lender is just going to charge more upfront to cover the costs and risks of early prepayment, and that's bad for the borrower for several reasons, including taxes.)
75% interest can be quite reasonable. Suppose you're borrowing the money to do some business, and there's a lot of risk that you'll fail and not repay. The high interest rate is effectively an equity participation. And if the term of the loan is a month, 75% annually isn't that many dollars.
Mortgage loans are an interesting topic, really. The way they are amortized intentionally treats regular payments on the loans as addressing, first and foremost, the interest owed over the lifetime of the loan, so that the early payments are defined to have made almost no payment on the principal, keeping the overall payoff to the bank high (and reducing the motivation for early buyout, since the borrower won't have lowered the "payoff price" of the loan very much in the first couple years of it). This is why you can save yourself *so* much money by paying an additional amount to the principal on a monthly basis on a mortgage (noting that most mortgage companies require that you "specify" the extra money paid is to be applied to the principal, or they screw you over by applying it to interest also).
So if I lend you money for 25 years at 5%, that's morally questionable; but if it's a 1-year loan, and at the end of that year you repay me and borrow the money again, repeat for 25 years, that's fine because each loan is only 5% total interest? Did you notice that there really isn't any difference between the two cases, except a check going back and forth each year?
"I have to admit, I wonder if there's not an interest rate that actually raises the chance that someone will default on a loan, i.e. "take the money and run" rather than pay such an expensive loan back."
There probably is, but that actually argues against the need for a cap, since charging too high a rate would be self-defeating.
"But, seriously, you don't have a problem with it if someone is charging 45-75% interest on a loan?"
The counter-question is "Why is the borrower considering taking a loan at that high a rate?" If it's because a lender is charging them a higher rate than they could get elsewhere, a public information campaign would be a more appropriate solution to teach people to shop around. If it's because the administrative costs and default risk of the loan actually make that high a rate necessary, then the alternative is for the person to get no loan. While that might be better in some cases, there are numerous examples, of such loans doing a lot of good, especially in third world countries.
Take the case of CompartamosBanco, a lending institution in Mexico. It charges rates in that range and higher. However, it makes tiny loans to people with no credit history (and often no bank accounts) in remote villages, so that they can start businesses. If it was constrained to interest rates such as we see in the U.S., these people would never get loans at all, save by the grace of charity. But because it can lend profitably, CompartamosBanco lets them get their businesses started, and other lenders are moving in, causing competition to start to push the rates down.
There was a similar surge of microlending a while ago in South Africa, but the government capped rates and killed the industry.
From the research paper's conclusion:
"The interest rate ceiling produces a series of adverse effects. They cause charges to drift up to the ceiling and they also encourage illegal lending. Instead of regulating interest rates a more effective approach to ensure that the rates charged by micro lenders are appropriate is to encourage competition. This will spur innovation aimed at reducing the risks and costs associated with micro lending."
There probably is, but that actually argues against the need for a cap, since charging too high a rate would be self-defeating.
"But, seriously, you don't have a problem with it if someone is charging 45-75% interest on a loan?"
The counter-question is "Why is the borrower considering taking a loan at that high a rate?" If it's because a lender is charging them a higher rate than they could get elsewhere, a public information campaign would be a more appropriate solution to teach people to shop around. If it's because the administrative costs and default risk of the loan actually make that high a rate necessary, then the alternative is for the person to get no loan. While that might be better in some cases, there are numerous examples, of such loans doing a lot of good, especially in third world countries.
Take the case of CompartamosBanco, a lending institution in Mexico. It charges rates in that range and higher. However, it makes tiny loans to people with no credit history (and often no bank accounts) in remote villages, so that they can start businesses. If it was constrained to interest rates such as we see in the U.S., these people would never get loans at all, save by the grace of charity. But because it can lend profitably, CompartamosBanco lets them get their businesses started, and other lenders are moving in, causing competition to start to push the rates down.
There was a similar surge of microlending a while ago in South Africa, but the government capped rates and killed the industry.
From the research paper's conclusion:
"The interest rate ceiling produces a series of adverse effects. They cause charges to drift up to the ceiling and they also encourage illegal lending. Instead of regulating interest rates a more effective approach to ensure that the rates charged by micro lenders are appropriate is to encourage competition. This will spur innovation aimed at reducing the risks and costs associated with micro lending."
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