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What Are Usury Laws and Why You Should Care

What Are Usury Laws and Why You Should Care
Lauren Ward
Lauren WardUpdated December 3, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Usury laws regulate the amount of interest a lender can charge you. These laws are designed to help protect consumers from unreasonably high interest rates on loans and credit cards.Here’s what you need to know about usury laws and how they can help protect you from predatory lenders. 

What Is a Usury Law?

The word “usury” means an unethical lending practice, such as an excessively high interest rate. The usury laws definition refers to laws that set caps on the amount of interest a lender can charge consumers. Usury laws help prevent predatory lending and enforce fair lending practices.Usury laws are typically regulated by each state rather than at a federal level. Individual states set their own limits on interest rates. That means interest rates can range dramatically between states.Furthermore, some lenders, such as banks, credit unions, and credit card companies, can legally charge borrowers the interest rate in the state where they are headquartered rather than the state the borrower lives in.  

Understanding Usury Rates

While the laws for usury rates are quite complex, essentially, they represent the maximum amount a lender can charge for a loan product. Each state’s usury laws definition can vary, however. And not every state has a clearly defined usury rate. Also, states may have different rules on which types of lenders usury rates apply to.  You can look up your state’s usury laws to see what the maximum interest rate is. The state’s government website can be a good place to start.

Why Is Usury Illegal?

Usury is illegal because it harms consumers by charging them excessive interest rates. For instance, predatory lenders may charge borrowers extremely high interest rates that it’s difficult for them to pay off. Loan sharks are an illegitimate type of lender that may use coercion to get borrowers to accept and comply with unlawfully high interest rates. They often target borrowers who might have trouble getting a loan from a legitimate lender. Usury laws are designed to protect consumers from such practices.Recommended: Need to Borrow Money? 9 Ways to Consider

Personal Loan Interest Rate Restrictions 

Rate restrictions vary by state. Each state sets its own maximum for personal loan interest rates. To find yours, you’ll need to look up the usury rate in your state. And remember, the rate you are charged could be the maximum rate in the state the lender is headquartered in, which could be higher than the limit set by your state. In the end, the interest rate you get on a loan may depend on the loan product you are approved for and the state the lender is based in. That’s why one of the important personal loan tips is to shop around for the best rates and terms.

Examples of Usury 

In some states, usury laws may not apply to certain types of loans, such as payday loans. In certain areas of the country, there have been payday loans with interest rates as high as 767%. There are loopholes some lenders can work around. Texas, for example, has a 10% maximum interest rate threshold, but payday lenders are able to maneuver around this law because they’re not technically lenders. Instead, they are registered as credit access businesses. Under current Texas law, there aren’t any caps on the fees a credit access business can charge.  Recommended: What Are Private Lenders?

Do Usury Laws Vary By State?

Each state has its own set of usury laws, and they can be quite complex.For example, in Virginia there is a maximum interest rate of 6%. However, this maximum does not apply to certain loans, including revolving credit accounts and mortgages. In Mississippi, the maximum interest rate is 8% — unless a higher amount is agreed to in writing if a loan exceeds more than $2,000. That means if you sign an agreement to borrow more than $2,000 with a loan that has a higher interest rate than 8%, you’re legally agreeing to that higher interest rate.Washington state has a long list of usury laws and exemptions. Under state law, commercial, agriculture, investment, and business loans are all exempt from usury law. To understand your state’s laws and restrictions, look up the usury maximum as well as any exemptions for lenders. 

Usury Law Consequences

The penalties for usury vary by state. If a lender is guilty of usury, they may have to return all interest charged to the borrower plus additional fees, depending on state law. It’s possible the lender may even have criminal charges placed on them, which could result in jail time. 

What to Do if a Lender Is Charging Usury Rates

If you feel a lender is charging you rates that are above your state’s maximum amount, check your state’s usury laws. Because each state has a variety of exemptions and usury laws can be very confusing, you might want to contact an attorney for legal advice. If the lender has violated a usury law, you may be entitled to a certain amount of compensation on any excessive interest you’ve paid on the loan. 

The Takeaway

Usury is the practice of charging an excessively high interest rate for a loan product. Lenders convicted of usury may have to repay any interest fees they charged to borrowers plus additional fees. However, each state sets its own usury laws, and there can be exemptions for certain types of lenders. To protect yourself, learn and understand your state’s laws, shop around when borrowing money for the best rates and terms, and read the fine print before signing any agreement. 

3 Personal Loan Tips

  1. Personal loan interest rates vary from lender to lender, but generally depend on your credit score. With one online application, Lantern by SoFi makes it easy to find and compare the personal loan interest rates that you may qualify for.
  2. If the interest rates you’re being offered seem too high, try lowering the loan amount. Generally, the larger the loan, the greater the risk for lenders, who likely charge a higher interest rate for the increased risk level.
  3. Watch out for lenders who advertise “guaranteed” loans. Legitimate lenders will want to know your creditworthiness before offering a loan.  

Frequently Asked Questions

Why are there usury laws?
What is the difference between interest rate and usury?
What is the highest interest rate a lender can charge?
Photo credit: iStock/champc

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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