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What Is Usury?

Understanding Usury

Regulations on Usury and Prior Lending

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

What Is Usury?

Usury is the act of lending money at an interest rate that is deemed to be unreasonable excessive or is greater than the amount allowed by the law. The practice first came into use in England under King Henry VIII and originally pertained to the charge of any interest on loans. Over time it evolved to refer to charging excessive interest but in some religions and parts of the world charging any interest is thought to be illegal.1

The most important takeaways

Usury refers to the act of lending money at an interest rate that is deemed to be unreasonable high or that is higher than the rates permitted by the law.

It first became common in England during the reign of Henry VIII, the King of England. Henry VIII.

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

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

States are able to set their own laws regarding usury and, consequently, each state has different usury interest rates.

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Understanding Usury

The practice of charging interest for loans is not new, but in 16th-century England there were restrictions imposed on the amount of interest you could charge legally on a loan. In the past, however, certain religions have abstained from using usury completely since charging interest went against the fundamental principles they abide by.

Because early lending was done between individuals and small groups as opposed to the banking system of today, establishing strict social norms for lending terms was deemed vital.

Credit cards with high rates of interest cards are among the driving reasons behind the excessive levels of consumer debt within the U.S.

Specifically, Judaism, Christianity, and Islam (the three Abrahamic faiths) adopt a firm stand against usury. Many passages from the Old Testament condemn the practice of usury, particularly when lending money to people who do not have access to secure means of financing. For instance, in the Jewish community, this was the reason for the principle of lending money with interest only to non-natives.

The Old Testament’s prohibition against usury led to the Christian tradition of not lending money. Certain Christians believe that those who lend should not have any expectation of remuneration. In the Protestant Reformation in the 16th century brought about a distinction between usury (charging high interest prices) as well as the acceptable loan of money with low interest rates. Islam, on the other hand historically, has not established this distinction, however the practice of charging interest isn’t allowed in Islam.

The Usury Law and the Predatory Lending

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

Predatory lending is described by FDIC in the sense of “imposing unfair and excessive loan conditions on customers.” Predatory lending often targets groups with less access to and understanding of more traditional methods of financing. Predatory lenders can charge unreasonably high-interest rates and require significant collateral in the unlikely event the borrower defaults.2

Predatory lending may also be associated with payday loans, also termed payday advances or small-dollar loans and many other names. Payday loans are small-sum, short-term unsecure loans that can seem to pose a substantial risk to the lender. To prevent usury, some states limit the annual percentage rate (APR) that a payday lender can charge, while some ban the practice entirely.

The laws governing usury are set by the state and vary between states. The rate that is allowed by state usury laws is based on the amount of the loan and the type of individual/entity who is making the loan and the kind of loan. Usury laws do not cover all loans but only to certain types as determined to be appropriate by the government.

The kinds of loans that are subject to laws on usury are those with no written contract from the bank or other institution, loans with a written agreement with a bank that is not a bank or personal student loans, payday loans, and all other kinds of contracts with non-bank institutes.

Credit cards carry very high rates of interest, however credit cards don’t fall under the law of usury as defined 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 individual by states, the penalties for violating the laws on usury can be different. The penalties can include the obligation for the lender to pay back all interest paid on the loan to the borrower of the time with additional fees in addition. The fees are usually more than the interest that the creditor could have earned. Violators could also be sentenced to prison time.

Example of Usury

John is unemployed and has no health insurance. He is injured while fixing his roof which results in medical bills that cost the client $10,000. John can pay $2,000 from his savings account, but has no money in cash to cover his medical bills. John asks friends and family members to borrow money but they do not have cash.

A bit pressed, John borrows money from a friend of a friend he doesn’t know very well. The creditor loans him the amount of $8,000 and charges him an interest rate of 18% per month. The state in which John reside has an usury law in place that limits the interest rate to 9%. In this case the creditor is charging john usury and in violation of the law of the state.

Is Usury a crime?

Usury is most often considered a crime, but it could be considered a violation. The federal government, as well as every state, has its own usury laws, stating the maximum rate of interest that can be charged on specific types of loans. If a creditor is charged rates higher than this, they’ll be in violation of the law and would be held accountable for violating the law on usury.

What Is the Current Usury Rate?

Each state has its own rate for usury and the method of calculation. For instance, the present Usury rates in North Dakota is the “maximum rate of interest that can be charged on loans of money made by lenders that are not regulated and is up to 5.5 percent more than the present cost of money, as shown by the average rate of interest due to U.S. Treasury Bills maturing within 6 months, but in all likelihood the maximum permitted interest rate ceiling may not exceed 7%.. “4

What was the date that Usury Become Illegal?

Usury has a long history. It is primarily unlawful to protect individuals from taking advantage of predatory loan practices; situations where people have to borrow money but are charged a high interest rate and often have difficulty paying back the loan with interest or financial ruin. Usury is also not permitted in all religions, and this has had an impact on its legality within society.

Do Usury Laws apply to private loans?

Yes, usury laws do cover private loans. The majority of loans made outside of the banking institution are subject to laws governing usury to prevent fraudulent lending practices.