Definition and Examples of Usury
Usury is lending money to someone and charging a very high interest rate on the loan that exceeds the legally allowed limit.
Usury aims to extract excessive interest rates on loans. Usury laws are designed to protect borrowers from predatory lenders and greedy lenders. Usury laws vary according to the state you live in and depending on the financial product.
How Usury Works
If you take out a loan from a bank or an online lender, the lender will charge interest for the privilege of lending you money. However, there are rules that lenders must follow to ensure they are charging interest and not committing usury.
Interest is a proportional fee you pay to the lender when taking out a loan, while usury involves imposing excessive interest rates that are disproportionate to the borrowers. Interest is a fair and regulated practice, but there are legal consequences for committing usury.
History of Usury
In the early days, lending was done between individuals or small groups of people. Over time, with the emergence of banking systems, societies began to establish laws regarding what constitutes reasonable interest amounts.
In 1545, when King Henry VIII was ruling England, Parliament enacted a law allowing interest rates up to 10%, with any amount exceeding that considered usury. In the United States, the colonies continued this tradition, enacting their own usury laws based on the English model. This practice continued even after the colonies gained independence from England.
Current Usury Laws
Currently, most states have usury laws that set a maximum limit on the amount of interest a lender can charge. These rates can vary significantly from state to state and may differ depending on the type of financial product you are using.
For example, Hawaii sets a maximum interest rate of 10% for loans without a written contract specifying a different rate. Consumer credit transactions in the state carry a maximum interest rate of 12%, and credit card companies can charge rates up to 18%.
Impact on Consumers
The goal of usury laws is to protect borrowers from predatory lending practices. Excessive interest rates can trap borrowers in debt, forcing them to continue borrowing to pay off the previous loan.
Falling into a cycle of debt can cause long-term financial damage. According to the Consumer Financial Protection Bureau (CFPB), these types of loans are marketed to vulnerable borrowers who cannot repay them.
These borrowers often face a choice between borrowing more money, defaulting on the loan, or ignoring other financial responsibilities. Proper usury laws can help protect all consumers from this type of exploitation.
Usury vs. Interest
Usury Interest
Imposing excessive interest rates on loan Proportional fees paid by borrowers on a lending product
Illegal Legal to impose reasonable interest rates on the loan
Laws vary by state Vary by type of lender and financial product
Predatory Lending
Today, usury laws aim to protect borrowers from predatory lenders. Predatory lending is the use of deceptive, misleading, and unfair tactics to trick borrowers into taking loans they cannot repay.
These lenders often target individuals who have no access to traditional forms of financing, typically by offering payday loans. Payday loans generally amount to around $500 or less and are usually due within two weeks to four weeks from the date they are issued.
Typically, the loan is repaid from the borrower’s next paycheck and often comes with fees equivalent to an annual percentage rate of up to 400%. Different states vary in their regulations regarding payday loans. Some set maximum interest and fees that payday lenders can charge, while others completely ban this practice.
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