by Robert Frenz
Under Old English law, if I borrowed $100 from you and a requirement was that I return $102, it would have been called "usury" for the taking of any "interest" was considered immoral and illegal. In fact, the Bible evens declares this. In fact, usury and extortion were often considered synonymous. Barter and cash payments were the rule of the day but certain people had an idea – make legal the payment of interest and encourage borrowing against the future. (The Third Reich was against this sort of middleman rip-off and that was one of the reasons the Reich had to be destroyed.) The law was subsequently modified to make usury legal and with it came a new definition: Usury was to be an illegal rate of interest or payment. Thus the banks and the government were joined. Today, most credit cards are limited to 25 percent interest but even though it is exorbitant, it is not illegal and hence not usurious. Notice how robbery can be made legal simply by changing a law. Americans are being screwed every which way but loose – legally – and we are admonished to obey those laws because flag-waving, apple pie eating, America is a "nation of laws and not of men."
Simple interest of 10 percent means that I can borrow $1000 for 1 year and pay back $1100 at the end of that year. I had the use of the $1000 for a whole year. This was the simple interest loan.
The banks then came up with the idea of the "discounted loan". This meant that they'd get their interest "up front". So if you obtained a $1000 discounted loan at 10 percent, they'd hand you only $900. Since you only had the use of $900 for the year, you were actually paying $100 interest on $900, or a rate of 11.1 percent which they still chose to call 10 percent. Their "take" thus was increased by 11 percent which represented a "mark up" in their profits. How would you like to get an 11 percent increase in your wages just by changing the rules?
As is sometimes the case, people with loans often have the good fortune to be in a position to pay the loan back before it is due. Thus they formulated the "Rule of 78" for early close outs. Interest was apportioned according to the number of months one had the loan. I'll not trouble you with the arithmetic as to how the pay back was calculated but take my word for it, it wasn't to your benefit. The banks, like our corrupt Congress, found another legal way to increase their income.
Years ago, the spread between savings account rates and loan rates was about 1 percent. If a bank gave 5 percent on your savings, you could expect to pay 6 percent for a loan. Today, one local bank pays 1.8 percent on savings and gets 19.8 percent on loans. That's good for business – the bank's, that is.
Electronic computers changed the whole interest calculating scene. It was now possible to apportion interest, modeled after the Rule of 78, on a periodic basis. Monthly payments became the vogue. One borrowed $1000 for a year but he did not have that $1000 for a year. Some of it was handed back after 1 month. The borrower only had the use of 1 payment for the entire year.
At a simple interest of 10 percent, a loan of $1000 would cost you $100 in interest or a total of $1100. However, if you were required to make 2 six month payments of $550, you really be paying 13.2 percent on what you borrowed since you didn't have all of the money all of the time. This sort of thing is called "compounding".
If the $1100 due were paid back in 12 payments of $91.67, you'd really be paying about 18 percent interest on your loan. Of course the banks don't do it exactly this way. They "compound" it daily, that is, on a basis of 365 intervals which means more for them and less for you. That's why when you pay off the balance on your credit card loan, you'll see a couple of dollars still owed when the next statement arrives. Their interest clock never stops ticking.
Americans must love getting the shaft since I've heard very few of them complain.