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Notion of interest
Interest is a value exacted or promised over and above the restitution of a borrowed capital.
- Moratory interest, that is interest due as an indemnity or a penalty for delay in payment, is distinguished from
- compensatory interest, which indemnifies the lender for the danger he really runs of losing his capital, the loss that he suffers or the gain of which he deprives himself in disembarrassing himself of his capital during the period of the loan, and from
- lucrative interest, which is an emolument that the lender would not gain without lending.
Interest originates in the loan of goods for consumption, which permits the borrower to expend or to destroy the things lent, on condition of giving back an equal number of the same kind or quality. The sum to be paid for the usage of an article, which must itself be given back, is called hire . Everything which is consumed by usage: corn, wine, oil, fruit, etc., can be the matter of a loan (former sense), but ordinarily it is a sum of money which is lent.
Legitimacy of lending at interest
Is it permitted to lend at interest? Formerly (see U SURY ) the Church rigorously condemned the exacting of anything over and above capital, except when, by reason of some special circumstance, the lender was in danger of losing his capital or could not advance his loan of money without exposing himself to a loss or to deprivation of a gain. These special reasons, which authorise the charging of interest, are called extrinsic titles .
Besides these compensatory interests, the Church has likewise admitted moratory interest. In our day, she permits the general practice of lending at interest, that is to say, she authorizes the impost, without one's having to enquire if, on lending his money, he has suffered a loss or deprived himself of a gain, provided he demand a moderate interest for the money he lends. This demand is never unjust. Charity alone, not justice, can oblige anyone to make a gratuitous loan (see the replies of the Penitentiary and of the Holy Office since 1830).
What is the reason for this change in the attitude of the Church towards the exaction of interest? As may be more fully seen in the article U SURY , this differece is due to economical circumstances. The price of goods is regulated by common valuation, and the latter by the utility that their possession ordinarily brings in a given centre. Now, today, otherwise than formerly, one can commonly employ one's money fruitfully, at least by putting it into a syndicate. Hence, today, the mere possession of money means a certain value. Whoever hands over this possession can claim in return this value. Thus it is that one acts in demanding an interest.
Just rate of interest
Even today one can still sin against justice by demanding too high an interest, or usury , as it is called. What interest then is just and moderate? Theoretically, and in an abstract way, the fair rate of interest nearly corresponds to the average gain that those engaged in business may generally expect in a determined centre. It nearly corresponds, for the interest being guaranteed, whilst the profit is uncertain, we must discount the value of an insurance premium from the average profit. Accordingly, in a determined centre, if those who sink their money in buildings, land, or industrial undertakings generally look for a profit of 6 percent, the just rate of interest will be about 4 or 5 percent. This rate covers the risks and ordinary inconveniences of lending. But if one had to run special risks or had to give up an extraordinary premium, one might in all justice exact a higher rate of interest. Such, therefore, is the theoretical rule. In practice, however, as even the answer of the Sacred Penitentiary shows (18 April, 1889), the best course is to conform to the usages established amongst men, precisely as one does with regard to other prices, and, as happens in the case of such prices, particular circumstances influece the rate of interest, either by increasing or lowering it. In this way, the security offered by advances to the governments of wealthy countries and those that cover mortgages diminish the rate for public loans and loans on mortgage. On the contrary, the interest on shipping, and mercantile business is higher than that in civil business, on account of the greater uncertainty in sea voyages and in commercial enterprise.
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