Five Ways You’ll be able to Payday Loans Near Me US Without Investing A lot Of Your Time

Table of Contents

How Is Usury?

Understanding Usury

Usury Laws and Predatory Lending

A good example of Usury

FAQs on Usury

Personal Finance Lending

What Is Usury? Definition, How It Works Legality, and an Example

By Julia Kagan

Updated February 07, 2022

Review by Thomas Brock

How Is Usury?

Usury refers to the act of loaning money at a rate that is thought to be unreasonably high or higher than the amount allowed by law. Usury was first introduced in England under King Henry VIII and originally pertained to the charge of any interest on funds that were loaned. As time passed, it grew to include charging interest that was excessive, but in some religions and regions of the world charging any 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 that is higher than the rates permitted by law.

It was first introduced within England in the time of the reign of King Henry VIII.

Judaism, Christianity, and Islam especially take a very firm stance against usury.

Today, laws governing usury help safeguard investors from lenders who are predatory.

States have their own laws regarding usury and, as a result, each state has different usury interest rates.

Loan Shark Definition

Understanding Usury

The practice of charging interest for loans is not a new concept however, in the 16th century England, limitations were put in place regarding the interest one could legally charge on an loan. But throughout the ages, certain religions have abstained from usury altogether as the idea of charging interest was against the fundamental principles they abide by.

Given that earlier lending was conducted in small groups and between individuals as opposed to the modern banking system used today, establishing strict social norms for lending terms was considered to be essential.

High interest rates on credit cards are among the primary reasons for large levels of consumer debt across the U.S.

Specifically, Judaism, Christianity, and Islam (the three Abrahamic religions) have a strong stand against usury. A number of passages in the Old Testament condemn the practice of usury. This is especially true when lending to less wealthy people who do not have access to safe ways of financing. For instance, in the Jewish community, this created the practice of lending money at a rate of interest only to those who were not a part of the community.

The Old Testament’s prohibition against usury also led to the Christian tradition of not lending money. A few Christians believe that those who lend should not expect anything in return. The Protestant Reformation in the 16th century created a distinction between usury (charging high-interest prices) in contrast to the less shady lending of money at low-interest rates. Islam on the other hand has never made this distinction, but it is not permitted to charge interest in Islam.

Usury Laws and Predatory Lending

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

Predatory lending is broadly defined by the FDIC as “imposing unfair and abusive loan conditions on borrowers.” Predatory lending typically targets people with less access to and familiarity with more traditional forms of financing. Predatory lenders can charge unreasonably high rates of interest and require substantial collateral in the likely event the borrower defaults.2

Predatory lending may also be associated to payday loans, also termed payday advances or small-dollar loans, among other names. Payday loans are small-sum, short-term non-secure loans, which can appear to pose a substantial risk to the lender. To avoid usury, certain states limit the rate of annual percent (APR) that payday lenders are allowed to charge, while others outlaw the practice entirely.

The laws governing usury are set by state laws and differ from state to state. The rate allowed by state usury laws is based on the amount of the loan as well as the kind of individual/entity making the loan, and the type of loan. Usury laws don’t apply to all loans however they do apply to specific types as determined by the state.

The kinds of loans that are subject to the usury law include ones where there is no written agreement from the bank or other institution, loans with a written agreement with a non-bank institution or personal student loans, payday loans, and any other types of contracts with non-bank institutes.

Credit cards carry very high interest rates but credit cards don’t fall under usury laws as determined by a 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 breaking usury laws vary. The penalty may be that the lender must return all interest due to the borrower frequently with additional charges in addition. The fees usually amount to greater than what that the creditor would have received. In addition, those who violate the law could be sentenced to jail sentences.

A good example of Usury

John is unemployed and does not have health insurance. He injures himself while fixing his roof, resulting in medical bills costing him $10,000. John can pay $2,000 of his savings, but is unable to pay the rest in cash to pay his medical bills. John asks his family and friends to borrow money, but none have available cash.

In a state of stress, John borrows money from the friend of a person who he doesn’t really know. The lender loans him the $8,000 and charges him an interest of 17% per month. The state where John is a resident has law on usury in force that restricts rates of interest to nine%. In this case the creditor is allegedly charging John usury and is in violation the law of the state.

Is Usury a crime?

Usury is usually an offense, but it can also be a violation. The federal government, as well as each state, has its specific laws on usury that specify the maximum rate of interest that can be charged on certain types of loans. If a creditor is charged more than this, they will be breaking the law and held responsible for a violation of the law on usury.

What is the current Usury Rate?

Each state specifies the rate of its own usury and how it is calculated. For instance, the current Usury Rate is in North Dakota is the “maximum rate of interest which may be charged on loans of money by lenders that are not regulated and is up to 5.5 percent higher than the present cost of money, as shown by the average interest rate payable for U.S. Treasury Bills maturing within six months; but in any event, the maximum allowable interest rate ceiling may not be less than 7%. “4

When did Usury Became Illegal?

It has a long and rich history. It has primarily become illegal to prevent individuals from taking advantage of predatory loan practices, situations that require people to borrow money but are being charged high interest rates which can lead to having difficulty repaying the loan which can result in financial ruin. The practice of taking out loans is not allowed in some religions, and this has resulted in a change in its legality within society.

Do Usury Laws Apply to Private Loans?

Yes, usury laws do apply to private loans. Most loans made outside of a banking institution are subject to usury laws to stop unjust lending methods.