What Is Usury? Usury is the practice of giving someone a loan and then charging them a disproportionately high-interest rate one that is higher than what is permitted by law.
Definition and Examples of Usury
The practice of lending money and overcharging borrowers with interest on loans is known as usury. Anything that exceeds a statutory maximum—which varies per state—is considered excessive interest. Usually, the interest rate is flat rather than compound interest-based.
In order to safeguard customers from exploitative lending practices, many states have passed usury laws.
For instance, a borrower who needs a personal loan but whose bank rejects their application may be forced to settle for a lender that will charge whatever interest rate they like. If such a thing were allowed, this might be 40% or perhaps higher. But depending on the state legislation, that can be regarded as usury or as exceeding the permissible maximum interest rate.
Laws against usury shield vulnerable borrowers from being exploited by unscrupulous lenders. They can also assist people in staying out of a vicious cycle of debt and bad credit, which can make it difficult for them to access the future financial products they might require.
How Usury Works
For the convenience of lending you the money, a bank or online lender will charge you interest if you take out a loan from them. To make sure they are charging interest and not engaging in usury, your lender must go by a set of regulations.
History of Usury
Lending took place primarily between individuals or small groups in the early years. Societies started making regulations about what constituted reasonable rates of interest when banking systems emerged over time.
When King Henry VIII of England was in power in 1545, Parliament approved a law allowing interest rates of up to 10%; anything above was regarded as usury. The American colonies carried on this custom by enacting their own usury laws that were based on the English model. This behavior persisted even after the colonies obtained independence from England.
Today’s Usury Laws
Currently, most states have usury laws in place that put a ceiling on the highest interest rate a lender is permitted to charge. These rates may range depending on the sort of financial instrument you’re utilizing and may vary dramatically by state.
Hawaii, for instance, caps interest rates at 10% for loans without a signed agreement stipulating a different rate. Consumer credit transactions in the state are subject to an interest rate cap of 12%; credit card issuers may impose a maximum rate of 18%.
Impact on the Consumer
Usury regulations are intended to safeguard consumers from unfair loan practices. Excessive interest rates can put borrowers in a debt cycle where they are compelled to keep taking on new debt in order to pay off their existing debt.
Getting caught in a debt cycle can have serious long-term financial repercussions. The Consumer Financial Protection Bureau (CFPB) further claims that these loans are frequently sold to gullible customers who lack the means to pay them back.
These debtors frequently have to decide between taking out further loans, defaulting on the loan, or ignoring other financial obligations. All consumers can be protected from this kind of abuse by adequate usury legislation.
Usury vs. Interest
| Usury | Interest |
| The act of charging unfairly high-interest rates on a loan | A percentage fee that borrowers pay on a lending product |
| Illegal | Legal to charge reasonable interest rates on a loan |
| Laws vary by state | Laws vary depending on the type of lender and financial product |
Predatory Lending
Usury regulations today are designed to safeguard borrowers from unscrupulous lenders. Predatory lending is the practice of persuading borrowers to take out loans they cannot afford to repay by utilizing unfair, dishonest, and fraudulent means.
These lenders frequently offer payday loans to people who don’t have access to more conventional kinds of credit. Payday loans typically have an amount of $500 or less and have a two- to four-week repayment period after they are granted.
The loan is usually due on the borrower’s following payday and frequently has fees that result in an APR of up to 400%. Payday loans are governed by distinct legislation in each state. While some restrict the amount of interest and fees that payday lenders may charge, others completely forbid the practice.
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