How to define usury: Lending terms 101

When you take out a loan, the lender charges you an interest rate as payment for their service. Usury laws restrict the amount of interest a lender can charge you, protecting consumers against unfair or unreasonably high rates.

In this guide, we define usury and help you understand how state usury laws help protect borrowers in the U.S. against predatory lending.

What does usury mean?

Usury is an unethical – and in some cases, illegal – practice of monetary lending that unfairly benefits the lender. This specifically applies to the lending of money at excessive interest rates. Each state guides lending practices with usury laws, and the specific details of these laws are different in each state.

The history of usury

The term “usury” dates back to the time of King Henry VIII, when charging any amount of interest on a loan was considered unethical. As trade expanded and the need for credit began to rise, only excessive interest rate charges constituted usury. To provide specific guidelines about what rates constituted usury, England set a legal maximum interest rate through the English Usury Act of 1545. This concept eventually took root in the U.S. and some other countries, providing the general context of modern-day usury laws.

Some religions and certain parts of the world, even today, still discourage charging interest in lending.

What is usury law?

To curb usury, laws at the statewide level – but not from the federal government – regulate and enforce fair lending practices. These laws, in some cases, limit how much interest companies can charge on credit cards, personal loans and real estate mortgages.

While usury rate restrictions differ depending on the state, all usury laws seek to provide some level of protection for consumers against predatory lending. Any act of lending that imposes unjust or dishonest loan terms on borrowers, forcing them to take out loans they can’t afford, is considered predatory lending. These loans may stipulate abnormally high interest rates, excessive fees or unfair loan terms. Most predatory lenders attempt to take advantage of borrowers through deceptive or aggressive sales tactics.

With predatory lending, borrowers may be forced into a financial hardship as their debt continues to accumulate. The result is that the borrower must choose between a default on their loan or incurring more debt to help cover the existing debt. State usury laws minimize the risk of predatory lending and offer better consumer protection.

Usury rate vs. interest rate

Usury rate and rate of interest, though similar, aren’t the same. Interest rates are a legal fee that lenders can charge borrowers, while usury rates are the maximum amount of interest a lender can charge before the imposed rates are considered excessive and illegal. Also, usury rates vary from state to state, while interest rates vary based on the financial product and lender.

Usury laws by state

Looking for the usury rate in your state? This interactive State Survey Consumer Finance Law tool allows you to see the legal rate for any of the 50 U.S. states. However, not all states have a clearly defined usury rate.

It’s important to keep in mind that some lenders, such as a traditional bank, can legally charge the usury rate for the home state of their headquarters – not the state where you live. For example, if your state’s usury rate is 18%, but a lender is headquartered in a state with a usury rate of 20%, a lender can legally charge you an interest rate of 20%. If a lender is headquartered in a state with no clearly defined usury rates, you’re at risk of less protection.

Additionally, certain state lending licenses may allow lenders to charge more than the state’s usury rate, up to the maximum limit prescribed by that state’s licensing law. Research your state’s usury laws or consult an attorney if you feel you’re being charged an illegal interest rate on your loan. You may be able to take legal action.

Final thoughts: How usury laws protect you

State usury laws limit the amount of interest that lenders may charge. Understanding the usury laws in your state and the state where your lender is headquartered helps to protect you from predatory lending.