Why Do We Pay Interest On Borrowed Money?

Is there a way we can pay for our basic needs – a home, fridge, TV and car – without having to pay back the principle and interest on our purchase?

Interest is the price we pay for the money we borrow. Those who lend us the money see themselves as giving up the advantage of having that cash – the liquidity advantage of money – so they charge a percentage on the principal loaned to us to compensate themselves for losing the benefit of having the cash to use.

So interest creates money for the lender without their actually producing anything for it. According to some thinkers, charging interest, or usury, violates natural law.

The theory of a natural law was put forward by Thomas Aquinas who said that this type of law is found in nature. Therefore, humans, being part of nature, have an innate sense of what’s right and wrong for both themselves and when acting towards others.

When interest is charged on the original amount of the loan, it has a compounding effect. This maximises returns for the lender at the expense of the borrower because your interest to be repaid is compounding. The financial economy operates on the basis of compound interest, whilst nature works in harmony with simple interest.

Money deposited in a bank grows from the interest added, but an apple tree can’t guarantee it’ll produce a harvest with compound interest. There is disjuncture between the natural and financial economies.

This results in the progressive destruction of nature and the absence of sustainable social justice, both of which have been at the root of financial crashes throughout history.

As the cost and demand for goods rises, many of us need to borrow money to pay for them. Are we doomed to live chained to work to pay off this debt?

Can we continue to choose this way of life whilst also trying to create a more positive, sustainable and just global society for us all?

If we’re questioning this choice then what needs to change, and how are we going to be part of the solution?

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