The Ethics of Usury

There was an article online this past week about a series of credit card offers going out around the United States with interest rates well above the levels normally associated with predatory lending, which has had some observers calling for the passage (or enforcement, where applicable) of usury laws. The idea of interest rates that exceed the level permitted by law is certainly not new; most of the world’s major religions have weighed in on the practice over the centuries and most civilized countries have to address the matter sooner or later. But despite the recently passed credit card reform laws, none of these rates are actually illegal – it turns out that charging someone 59.99% annual interest isn’t actually a crime, as long as you tell them about it upfront. The real question is whether we can support such services from an ethical standpoint – or if they should be condemned on those grounds as well…

To begin with, we should probably acknowledge that by some interpretations all forms of interest are prohibited by various religious texts, including those of most Western religions. This is the origin of the idea of usury as a sin, and of laws intended to prevent people from committing it. But if you can’t charge interest for making someone a loan then you can’t make any money by doing so, and therefore there is no real motivation for doing so. If you do extend loans to people you will probably have to add something to compensate for those individuals who abscond with your money or just lose all of it – a 5% increase if 5% of your customers never pay you back, or whatever. You might even offer better rates to those people who you feel are more likely to repay the loans, and steeper ones to people you consider a bad risk. Once you have done so, however, you are stepping onto a very slippery slope, because it is always possible that the person you believe has a 99% chance of paying you back won't, while the person you charged extra because you felt their odds were only one chance in ten will – in which case your practices were misguided if not actually discriminatory…

In the case of these 59.99% (and in a few cases 79.99%) credit cards, most of the people who are offered such rates were told about them upfront and accepted the cards because they could not get a credit card any other way, and modern life can be difficult sometimes if you don’t have one (try to rent a car, book a hotel, or buy an airline ticket without one). One could legitimately argue that the banks extending such programs are offering a service to people who would otherwise not be able to have a card; one could also argue that these institutions deserve something for the massive added risk they are taking – and, indeed, these credit card programs have an appalling default rate compared to conventional arrangements. And one could certainly argue that as long as such rates are openly offered and impartially administrated (and that no actual laws are broken) that a government has no business telling its citizens on what terms they may promise to repay a loan. But none of that changes the fact that these institutions are making money off of the underserved, the impoverished, and the desperate – and that all too often such programs are not sold or administrated fairly in the first place…

So my question is, should our government outlaw such credit programs, knowing that the customers using them will not be able to get loans any other way? Or should they allow such programs to continue, knowing that at least some of those institutions offering these card programs will exploit the ignorance, lack of sophistication, and in some cases outright greed of their customers? It would be a wonderful world in which no one ever needed credit, and no one ever had to charge for extending credit, but in this world, what should we do about these accounts?

It’s worth thinking about…