Ursury Laws

Usury laws are set to cap the interest rates on loans. Elizabeth Warren argues that we should we should return to using these laws. Both Consequentialism and the social contract theory can provide similar viewpoints on this issue. Each one provides strengths and weaknesses in regards to these laws.

Usury laws are regulations governing the amount of interest that can be charged on a loan. They specifically target the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied. These laws are designed to protect consumers. Consequentialism is the normative ethical theory that says that an act is morally right just because it produces the best actual or expected results. Social contract theory is a view in political philosophy that says that governmental power is legitimate if and only if it would be accepted by free, equal, and rational people intent on selecting principles of cooperative living. Also, a view in normative ethical theory that says that actions are morally right if and only if they are permitted by rules that free, equal, and rational people would agree to live by, on the condition that others obey these rules as well. (Shafer-Landau, 2012)

Elizabeth Warren states that we’ve had usury laws in the United States since colonial times, but in the early 1990s, we just very quietly got rid of them. Lenders are out there competing for customers who are already in financial trouble; only the way they’re competing is competing to get them in, and then hit them with 29, 35, 40 percent interest rates; $29 fees, $49 fees, $79 fees. … Those people are like machines that just keep turning out money for the credit cards. Once they’re trapped, they can’t get out of it. (Warren, 2004) This in turns causes those who cannot repay their debts to go into bankruptcy. Consumer protection such as the Usury laws should be in place to protect those consumers from unjust interest gouging.

On a Consequentialist standpoint on Usury laws, they can be good for the consumer but bad for the lender. Since Consequentialism is the view that an act produces the best benefit, for a lender, this would not allow for optimal profit. Since there would be a cap on interest, they would not be able to raise the interest rates for those with bad credit or those who cannot make their payments on time. As for a consumer, implementing these laws would greatly help them out. By capping the interest, the fear for going in debt or filing for bankruptcy would greatly decrease.

From a social contract theory standpoint, enforcing these laws would have to make lenders agree to put caps on their interest rates. I believe that this would also reduce the competition of lenders trying to get those that are financially troubled. For the consumer, when they enter into a lending contract it would benefit them as well giving them peace of mind knowing that they can get a loan without interest gouging. However social contract theory recognizes that people are rational, so consumer would have to understand the fact they would have to pay their debts on time etc.

The only really weakness that I see between the two is the fact that Social contract theory relies on people to be rational across the board. When money is concerned, people tend to be irrational and not make morally right decisions. This can be with both the lender and the consumer. I would have to whole heartedly agree with Elizabeth Warren on the fact that Usury laws should be brought back. Consequentialism would be the best option on this topic. I think our nation is becoming one of greed. Enforcing these laws would help out the consumers tremendously, especially now with our current economic situation.

References:

Warren, E. (2004, November 24). Interview elizabeth warren. Retrieved from http://www.pbs.org/wgbh/pages/frontline/shows/credit/interviews/warren.html Shafer-Landau, R. (2012). The fundamentals of ethics. (2nd ed., p. G-6). New York: Oxford University Press.