The first question the average person is likely to ask in response to talk about eliminating interest-bearing loans is “How am I going to make the big-ticket purchases that are so important to me like a car, a house or a college education?” A car purchase is often financed by a loan with the car serving as collateral. The loan is paid off over a period of years with the understanding that defaulting on the payments incurs the risk of having the car “repossessed.” The interest on the loan is built into the monthly payments, and the interest rate may depend on who is making the loan and who is buying the car. From the point of view of the buyer this is really no different from paying a higher price for the car in monthly installments without any “interest.” Sometimes car dealerships offer financing with a 0% annual rate for the loan. In other words they are willing to accept payment over time for the right price on the car (and whatever other fees they may hide in the fine print). If interest-bearing loans were illegal, this form of “financing” might be the norm.
The same thing is true on a larger scale with buying a house. Instead of paying rent to a landlord every month, one makes mortgage payments to a lender which cover the interest on the loan as well as the principal. The household budget includes monthly payments for housing either as rent or mortgage payments. The main difference between a car loan and a mortgage is that unlike a car whose value depreciates every year the value of a house may increase over time. The possibility of “refinancing” or selling at a profit lets homeowners view their house as an investment asset. It also encourages lenders to offer mortgages with abnormally low interest rates for the first few years and little or no downpayment. If the crisis of 2007-2008 taught us anything, it is the danger posed by such mortgages.
It is a strategic error to regard ones own home as an investment. It is not an asset that produces income unless one refinances it or otherwise borrows money against it. Home ownership has long be promoted as a means of stabilizing a community, and it does provide a family with more security than they might have in renting with the possibility of eviction always looming. People will always want to own their own homes, but how would people buy and sell houses without mortgages involving interest?
It is possible to imagine a real estate exchange that lets people buy and sell houses on credit without any interest being charged. Houses would just be paid for over an extended period of time. If a home being sold was previously purchased with credit from such an agency, much of the sale price might go towards paying off the balance on that previous purchase. Otherwise the agency would be in a position to extend credit to cover the purchase price. Perhaps some of the proceeds from the sale of the house would be used in a down payment on another house, so the impact of the transaction on the amount of money circulating in the economy would be minimized. Such an agency would not be a for-profit business, but more like a public utility answerable to the community it serves rather than to investors. There could be transaction fees to cover the operating costs of the agency, but they might not even be tied to the price of the house, and they could be split between the buyer and the seller. It is even conceivable that the operating costs for the agency would be paid for by property taxes. The managers at such an agency would be faced with the same tasks as those faced by loan officers at a traditional bank. They would have to appraise the value of the house, evaluate the credit-worthiness of the buyers and perhaps set down payment requirements. They would do all this with an eye to the overall needs of the needs of the community.
Other big ticket items that might currently require interest bearing loans are college education or medical emergencies. The are other better ways to finance education and healthcare. Education is an investment in the future of the whole society and should be regarded as the equivalent of infrastructure development and maintenance. Healthcare needs should be covered by proper medical insurance provided by some institution other than a for-profit business.
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