Rate Of Interest
For example, the legal rate of interest which may be charged by lenders of money in Illinois is 6 per cent, but in Georgia it is 8 per cent, while in some of the far western states as high as 12 per cent can be demanded. This difference in the rate of interest which borrowers must pay is not brought about, as might be supposed, by any variation in the degree of safety in the collateral they furnish, but is determined by the abundance or scarcity of available capital. Such states as New York, Illinois, Indiana, and Massachusetts are more fortunate in the abundance of capital than less favored states and this is what makes it possible to borrow at a smaller rate of interest than in the less populous states. In fact in these more settled communities, capital, in its eager hunt for desirable loans, comes into such keen competition as to offer itself at less than the interest which the state has fixed upon as legal. Thus it happens that in Massachusetts, Illinois, and other eastern and central states, the owners of fertile and productive farms can, without difficulty, obtain loans on a 5 per cent basis.
Although Georgia may have lands whose output of cotton and other crops indigenous to her soil will bring as much profit as the wheat and maize of the loamy, black belt of Central Illinois, its wealth is not sufficient to finance all the needs of its people and it must provide a legal interest rate attractive enough to draw to it capital which is beyond its borders. It is an axiom that the less populated a state, the smaller its resources and the more are its people dependent upon capital from the outside, for, after all, money is but a commodity to be bargained for and lets itself out at the best price obtainable.
Maximum Loans On Land
In different states the rules vary as to the extent to which loans may be made on farm property. In some places where farm lands, because of their productivity, are in eager demand, money may be borrowed on them up to 60 and even 70 per cent of their appraised market value, whereas in states where the farms are still comparatively new and the lands are not as readily saleable in the event that they must be sold to satisfy the loan, their borrowing capacity is restricted to a much lower percentage. It is the demand for the land which determines the equities insisted upon before a loan is obtainable, and not so much the fertility and productiveness of the land itself. It is true of the interest that is exacted from borrowers.
Mortgage And Bond Houses
The history of this form of investment would not be complete without a brief mention of an interesting development in the placing of farm mortgages. I have in mind the large business that is done in farm mortgages today among the class of smaller investors, who, while not in a position to purchase such securities outright, are still favored with an opportunity to place their capital in them.
From the demand of the smaller investors for farm mortgages as their ideal type of security, large companies have come into existence which sell notes of their own, secured by farm mortgages. The capital they obtain from the sale of their obligations they place out in farm mortgages, which mortgages are, in turn, deposited with some trustee as a security for their pledges to their clients. These notes are often known as “debenture bonds.” Sometimes they are otherwise designated; for example, a large western concern calls its notes “land grants,” although they are in the usual form and are sold in as small a denomination as $100. These institutions have made their notes so attractive to small investors that it is possible to sell them on easy payments.
The Influence Of Loans On Money
At times the borrowing requirements of our farmers play a very important part in our economic life. They must move their crops, and only money will do this. Thus it happens that around harvest time the interior banks find it necessary and profitable to advance money to farmers on their notes, secured by the crops, until they can send the produce to the central markets.
It has often happened that these loans have been precursors of a tight money market at a time when the available capital of the country has been insufficient to finance both the movements of the harvest and the expansion of industry. While a tight money market may be produced by other causes, more often it is superinduced by this annual crop demand upon the resources of our banks.
When this effect is produced in our financial centers, it is called a pinch in money. No doubt you have heard the term. As a business man and accustomed to negotiating loans at your bank, possibly you have personally felt its effects when your banker informed you that it was necessary to increase your interest rate until money became easier. By advancing interest rates, bankers aim to keep down loans within their available resources.
Farm Loans And Mortgages. Test Questions
1. What was probably the earliest form of investment?
2. Describe briefly the history of farm loans.
3. What are some of the outstanding characteristics of a modern mortgage?
4. To what extent are bank loans employed in farm mortgages?
5. Why do insurance companies invest heavily in farm mortgages?
6. What determines the rate of interest on farm mortgages? How does it compare with other securities?
7. What factors determine the maximum loans that may be secured on land?
8. Explain the work of mortgage bond houses in placing farm loans.
9. Show how harvest time affects interest rates on loans.