What Is Usury Law?

When you take out a loan, the lender will charge you an interest rate as payment for their service. To help keep you from paying an unfair interest rate, usury laws restrict the amount of interest a lender can charge you.

In this guide, we’ll take a closer look at what usury means and how state usury laws help protect borrowers in the U.S. against predatory lending.

The term “usury” dates back to King Henry VIII and Old English law when charging any interest amount on a loan was considered unethical. Over time, as trade expanded and the need for credit began to rise, only excessive interest rate charges constituted usury. To help define usury, England set a legal maximum interest rate in the mid-1500s, and this concept eventually took root in the U.S. and some other countries.

Within certain religions and in certain parts of the world, even today, the charging of any interest is discouraged. 

To help 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, they all seek to provide some level of protection for consumers against predatory lending. Predatory lending is any act of lending that imposes unjust or dishonest loan terms on borrowers, forcing them to take out loans they can’t afford. These loans could come with 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 and they have to 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 being considered excessive and illegal. Also, usury rates vary from state to state, while interest rates vary based on the financial product and lender.

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, but 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 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. Look into your state’s usury laws or talk to an attorney if you feel you’re being charged an illegal amount, and you may be able to take legal action.

When state usury laws are in place, lenders are limited in how much interest they can legally charge you. Having a good understanding of the usury laws in your state and the state where your lender is headquartered can help protect you from predatory lending.

To learn more about interest rate charges and other financial terms, check out the Learning Center.