What Is a Usury Rate?
Let me explain what a usury rate is: it's an interest rate that's excessively high compared to the prevailing market rates. You'll often see these associated with unsecured consumer loans, especially those given to subprime borrowers.
Key Takeaways on Usury Rates
Usury rates mean excessively high interest that's often illegal. They're linked to predatory lending, which is banned in many states and countries. In the US, these rates are defined by each state since there's no federal limit on maximum interest. They usually apply to consumer loans, but different rules might cover things like credit cards. Sometimes, it's hard to tell the difference between usury and just high rates that account for lending risks.
Understanding Usury Rates
Historically, usury meant any lending with interest, but now it refers only to loans with particularly high rates. These are what we call usury rates today. In the US, the FDIC connects usury to predatory lending, which imposes unfair terms on borrowers. Predatory lenders target groups with limited access to cheaper financing or less knowledge about it.
Lending with interest has been around for thousands of years. Major religions like Christianity, Judaism, and Islam have all criticized predatory lending and tried to regulate it over time.
Usury Laws by State
Usury laws tie directly to state regulations, and each state sets its own rules. For instance, in Washington, you can charge over 12% per year if it's agreed in writing. North Dakota sets its usury rate at 5.5% above the cost of money from six-month US Treasury Bills, with a minimum of 7%. Missouri uses the greater of the market rate or 10%, and second mortgages are deregulated there.
States have various ways to set these rates, such as basing them on short-term or long-term US Treasury Bill rates, the US prime rate, fixed rates, or whatever is agreed in writing. Remember, there's no federal regulation for usury interest rates.
Usury Rate Applications
Most usury rates apply to consumer loans, and laws dictate what banks can charge. But since states control this, usury often doesn't cover credit card debt, retail contracts, or consumer leases. Take Bank of America's credit cards in July 2022: after the intro period, variable APRs ranged from 15.49% to 25.49%. Courts say national banks can use the laws of their chartering state, not the customer's state. Also, not every state limits rates on business contracts.
Assessing Usury Rates
Figuring out if a rate is usurious or just high can be tricky, with states setting the boundaries. Payday lenders, who serve subprime borrowers, get accused of predation, but they claim high rates cover high risks—without them, those borrowers might have no options. You can check sources like TreasuryDirect or The Wall Street Journal for current rates on things like personal credit lines, auto loans, student loans, and mortgages to see if a lender's offer is reasonable. In a free market, it's often up to you, the borrower, to decide what rate you're willing to pay.
Example of Usury Rate
Consider James, a first-time homebuyer with a low credit score from past debt issues. Mainstream banks won't give him a mortgage, so he turns to a private lender, Diane, who offers 80% of the home price at 40% interest over 25 years. Diane says it's fair due to James's risk, but after researching market rates, James rejects it as predatory and unreasonably high.
What Is a Usury Interest Rate?
A usury interest rate is one that's illegally high. States set ceilings on rates for certain debts to curb predatory lending and boost economic activity—anything above is usury and illegal.
What's The Maximum Interest Rate Allowed By Law?
It varies by state based on local laws. Some states have no limits for certain loans, and restrictions can be lax. For example, New Mexico has considered bills to cap APRs from 175% to 36% on small loans.
Why Are Usury Interest Rates Illegal?
They're seen as predatory, where lenders exploit borrowers. Usury laws let lenders profit and cover risks but prevent gouging, encouraging fair business and protecting consumers.
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