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Table of Contents

What Is Usury?

Understanding Usury

The Usury Laws as well as Predatory Lending

A good example of Usury

Usury FAQs

Personal Finance Loans

What Is Usury? Definition, How It Functions, Legality, and Example

By Julia Kagan

Updated February 07, 2022.

Reviewed by Thomas Brock

How Is Usury?

Usury is the act lending money at an interest rate that is thought to be unreasonably high or that is higher than the maximum rate allowed by the law. Usury first became common in England under King Henry VIII and originally pertained to the charge of any interest on loaned funds. In time, it changed to include charging interest that was excessive however in certain religions and parts of the world, charging interest is thought to be illegal.1

The most important takeaways

Usury is the act of lending money at an interest rate that is considered unreasonably high or higher than the maximum rate allowed by the law.

It was first popularized during England in the time of the reign of King Henry VIII.

Judaism, Christianity, and Islam particularly take a strongly stance against the use of money.

Today, usury laws help to protect consumers from lenders who are predatory.

States are able to set their own usury laws and, as a result states have different usury interest rate caps.

Loan Shark Definition

Understanding Usury

Charging interest in loans is not a new concept However, in 16th-century England there were restrictions imposed on the amount of interest you could charge legally on a loan. But throughout the ages certain religions have stayed away from usury altogether as charging interest went against their core principles.

Since early lending was done between individuals and small groups as opposed to the banking system that is used today, establishing strict guidelines for lending conditions was considered vital.

The high interest rates charged on credit cards are one of the primary reasons for excessive levels of consumer debt within the U.S.

Specifically, Judaism, Christianity, and Islam (the three Abrahamic religions) adopt a firm stance against usury. Several passages in the Old Testament condemn the practice of usury, especially when lending to less wealthy people who do not have access to safe ways of financing. For instance, in the Jewish community, this was the reason for the principle of lending money with interest only to those who were not a part of the community.

The Old Testament’s condemnation of usury also led to the Christian tradition of not lending money. A few Christians believe that the people who lend money should not expect anything in return. This is because the Protestant Reformation in the 16th century created a distinction between usury (charging high-interest rates) as well as the acceptable loan of money with low interest rates. Islam, contrary has never established this distinction, however the practice of charging interest isn’t allowed in the religion.

The Usury Law and the Predatory Lending

Today, the laws on usury protect investors from predatory lenders.

Predatory lending is broadly identified by FDIC as “imposing unfair and unfair loan terms on the borrowers.” Predatory lending often targets groups that have less access to or knowledge of the more conventional types of financing. The lenders who are predatory can charge astronomically high interest rates and demand substantial collateral in the likely event a borrower defaults.2

Predatory lending may also be associated in payday loans, also termed payday advances or small-dollar loans and many other names. Payday loans are small-sum, short-term unsecure loans which could appear to be a significant risk for the lender. To stop usury, certain states limit the annual percentage rate (APR) that payday lenders can charge, while others outlaw the practice entirely.

The laws regarding usury are formulated by state laws and differ between states. The rate permitted by the state’s usury laws is based on the amount of the loan and the type of person or entity making the loan, and the type of loan. The laws on usury don’t cover all loans but only to certain types as determined as necessary by state law.

The kinds of loans that are subject to the usury law include ones where there is no written agreement from an institution that is not a bank, loans with a written agreement from a non-bank institute, personal student loans, payday loans, and other agreements with banks that do not have a bank.

Credit cards carry very high rates of interest, however credit cards are not under the usury law as defined by an U.S. Supreme Court ruling ( Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.) in 1978.3

Penalties for Usury

Since usury laws are formulated in each state, the penalties for violating usury laws vary. The penalties can include the obligation for the lender to pay back all interest paid due to the borrower often with additional fees in addition. The fees typically amount to greater than what rate the creditor could have earned. Violators could also be liable to jail time.

A good example of Usury

John has no job and has no health insurance. He injures himself while fixing his roof, leading to medical bills costing him $10,000. John is able to cover $2,000 from his savings account, but is unable to pay the rest in cash to cover the medical expenses. John asks his family and friends to lend him money however, none of them have cash.

In a state of stress, John borrows money from a friend of a friend who he doesn’t really know. The creditor loans him the amount of $8,000 and is charged the interest at 18% per month. The state in which John is a resident has law on usury which limits rates of interest to nine%. In this case the creditor is charging john usury and is in violation of the law of the state.

Is Usury a Crime?

Usury is usually a crime but can be considered a violation. Federal government and each state, has its specific laws on usury that specify the maximum rate of interest that is allowed on specific types of loans. If a creditor is charged more than this, they would be breaking the law and held responsible for a violation of the law on usury.

What is the Current Usury Rate?

Every state sets its own usury rate and how it is calculated. For instance, the present Usury Rate in North Dakota is the “maximum rate of interest which may be charged on loans of funds by non-regulated lenders and is equal to 5.5 percent higher than the cost currently charged for money, as shown by the average interest rate payable for U.S. Treasury Bills maturing within 6 months, but in any event, the maximum allowable interest rate ceiling may not exceed 7%.. “4

When Did Usury When Did Usury Become Illegal?

The history of Usury is long. It is primarily illegal to prevent individuals from predatory loan methods; instances in which people need to borrow money, but are charged a high interest rate, often resulting in having difficulty repaying the loan which can result in financial ruin. The practice of taking out loans is not allowed in some religious traditions, which has had an impact on its legality within society.

Do Usury Laws Apply to Private Loans?

Yes, the laws on usury do cover private loans. Most loans that are made without a banking institution are subject to the laws on usury to protect against unfair lending practices.