Little is more normalized in our financial institutions than being able to obtain loans from the government, be they for education, businesses, healthcare, or whatever else. Of course, private loans are also available, but those are less accessible. They often come with higher interest rates, and it is much more likely for a private loan provider to determine that somebody does not qualify for their loan than it is for the government to determine that same thing of the same person. Therefore, the government needs to be in the business of loaning money, right? Actually, that’s senseless, and I will explain why.

First of all, the government does not actually make money. There is only one way in which the state acquires wealth, and that is through taxation of the private sector. The money is originally made in the private sector, so the government is never dealing with money which they earned themselves. When a creditor makes a loan and determines at what interest rate they qualify for it, they are determining at what interest rate they feel adequately compensated for the risk of loaning out their own money. The government, by contrast, is in a fundamentally different position; they are taking a risk with someone else’s money.

To claim that the government should be in the business of making loans because private loans are generally too high-interest or too difficult to qualify for is no different than saying that government must take individuals’ money and use it in a way that those individuals would determine to be reckless and irresponsible. It would be absurd to assume that politicians are more knowledgeable or conscientious about how a person’s money should be used than the person whom the money actually belongs to. Therefore, we can safely assume that privately-determined loans will be more likely to fairly benefit everyone involved.

There are those who will say that private loan providers should be prevented by law from charging excessive interest. This is an example of a well-meaning but seriously harmful regulation. It is crucial to note the differences in time preference displayed by the lender and the person receiving the loan in most instances. The lender’s time preference is much lower than that of the borrower, meaning that the lender prefers a larger pay-off in the future, and the borrower prefers a smaller amount of money (the loan itself) sooner. This represents the healthy balance between lenders and borrowers.

Laws passed that prohibit certain interest rates on loans are far more likely to hurt those who need the loans than anyone else. To restrict a loan provider from charging a certain percentage of interest on their loans will only reduce the amount of loans they give out. If a person who is determined to be a rather high-risk borrower asks for a private loan, then their interest on that loan will be quite high. At least in that situation, though, the borrower can make a choice about whether to accept the responsibility of a high-interest loan. Most likely, they will choose what they believe will most benefit them. They could turn out to be wrong, but at least they had a choice.

If the amount of interest that could be charged on their loan were to be forced down by a government regulation, they would be deprived of this choice. The lender would simply not offer the loan to them at all. He or she would not feel as though the high risk was being compensated for well enough by the lowered interest rate.

This type of regulation is particularly undesirable because it makes it much more difficult for people to become self-employed. A person who is in need of a loan to start their own business, but has a questionable credit history, will be less likely to get the loan they need with laws lowering interest rates in place. Ultimately, the loan-making environment that will produce the most favorable results is one where lenders and borrowers determine the terms of loans. They must decide who to lend to or borrow from, with what interest rates, based upon their own subjective judgments of risk and reward.

Image credit to www.ratebusters.com.au.