Borrowing money and interest

[The Wanderer]

A PK has borrowed 10£ from an usurer. He has paid the same year part of the quantity, leaving just 3£ of debt.

The next year he says that the interest is applied considering only the current 3£ (that is, 1.5 + 3 = 4.5£ of debt) but I thought that the interest is calculated considering the original loan (that is, 5 + 3 = 8£ of debt).

Who is right?

[Morien]

The GM is right.

However, if you want to point to rules, Book of the Estate, p. 51. The interest is not compounded, but it is based on the original loan sum, as the example shows. Secondly, there is no 'paying off the loan early'. The repayment date was specified in the original loan contract. Until then, the interest is ticking. What you'd have to do is to pay the whole loan off (and the interest), at the agreed upon date. If you are unable to do that, bye bye your collateral (land).

[SaxBasilisk]

I just came across the quote from BotE, which I think is interesting:

"The loan is partially repaid. The usurer accepts the partial payment and puts it away — then acts exactly as if nothing was paid back. He figures he has done nothing wrong, since the agreement was not met. He keeps the partial payback. Problem? “Take it to the king.”"

Edited April 18, 2021 by SaxBasilisk

[Darius West]

The use of compound interest doesn't start until Leonardo Bonacci, called Fibonacci in 1202AD.  Within Pendragon, this means that it shouldn't start until Phase 3 of the Boy King Timeline (After 525).

Prior to 1202, there is generally an agreement to pay a flat sum i.e. Borrow 10£ today and pay back 12£ within a year and a day.  Failure to do so will mean the loan gets churned over.  Say you paid 6£.  The 2£ is the interest (non-compounding) and so that is paid.  That means the player has still reduced their loan by half, and now owes 6£+1£(interest).

Originally all usury (financial lending practices) was considered a sin within Christianity due to a misunderstanding of the lesson of the scourging of the temple from the Bible.  Thus a Christian could lend a friend money, but would never expect a penny of interest for it.  This proved to be crippling to the medieval economy, and thus the practice was mitigated to a "Christian rate of interest" (which was under 20%).  Most lending became the province of urban Jewry, who routinely charged very high interest rates, but generally not more than 50%.

Compound interest is a marvelous way of hiding exactly how much interest a borrower is paying, and that is the main reason for its success.  Most people are unaware that an interest rate of 7% will see them crudely paying back double what they borrowed over the life of their loan, for example (unless they can pay it off in a lump sum, which often seems "outrageously high" especially with exit fees, but normally isn't).

The usury laws were eventually confounded by the Medicis of Florence, who gamed the system.  Most of the coins of Europe had been debased by the monarchies who had re-minted silver with increasing lead content.  There were a few currencies like the Thaler (from which we get the term "Dollar) of Austria that had not been debased.  The Medicis would offer a loan in a debased currency, but demand repayment of the loan in a reliable high value currency like the Thaler.  At this point the Catholic Church threw their hands up in disgust and simply stopped trying to regulate usury, as the Medicis had broken no laws, and were in fact serving as a huge economic impetus by freeing up finances in Europe, ushering in the Renaissance etc.