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Usury Laws Definition, Purpose, Regulation and Enforcement

By Will Kenton

Updated July 18 2022

Reviewed by Thomas Brock

Facts checked By Hans Daniel Jasperson

Which Are Usury Laws?

Usury laws regulate the amount of interest that may be assessed on the loan. Usury laws specifically target the practice of charging too high interest rates on loans by imposing limits for the amount that could be levied. These laws are intended to safeguard consumers.

In the United States, individual states are accountable for establishing their individual usury laws.1 Though this type of financial transaction could fall under the Constitution’s commerce clause, Congress has not traditionally been concerned with usury. The federal government has considered the collection of usury by violent means to be a federal offense.2

The most important takeaways

Usury laws set a limit on how much interest is charged on many types of loans, such as credit cards or personal loans, or payday loans.

Usury laws are mostly regulated and enforced by the states, and not at a federal scale.

Because the usury laws are enacted by the states, the laws differ based on the location you reside; as a result, interest rates could be significantly higher in one state than the next.

Certain banks are able to charge the highest rate that is allowed in the state where they are registered, as opposed to the state in which you reside, a practice that was legalized following a 1978 U.S. Supreme Court ruling.

In What Ways Usury Laws Are Circumvented

Credit card companies usually have the benefit of being capable of charging charges for interest that have been regulated by the state in which the business was founded rather than relying on the usury laws in force to the states in which the borrowers live. Nationally chartered banks similarly can use the highest rate of interest permitted by the state where the institution was incorporated. Through incorporation into states such as Delaware and South Dakota, such lenders have historically enjoyed greater leeway allowed by those states’ more relaxed laws on usury.

Delaware specifically is often chosen as the state of incorporation of many financial institutions due to the flexibility granted in the charging of interest rates. The majority of domestic credit transactions in the U.S. market is conducted by firms that are were founded in Delaware although they could have their headquarters operating in other states.

Special Beacons

There’s some controversy over the validity of the usury laws following decisions made by the U.S. Supreme Court and legislation gave banks the ability to bypass the restrictions. The Supreme Court’s rulings regarding the decision in the case of Marquette National Bank v. First of Omaha Corp. permitted credit institutions to charge customers who were outside the states at the same rates that they could charge in states where they were incorporated.3

Delaware’s introduction of the Financial Center Development Act, which was largely a way to eliminate limits in the state on interest and fees that could be charged on loans to consumers, further amplified the desire of financial institutions to establish a branch there.4 The banks simply needed to establish subsidiaries or meet certain conditions for incorporation within the state in order to take advantage of the law and avoid usury laws in other states. In response to this move, some other states modified their laws on usury to grant locally-based banks the right to charge rates of interest that are on similar basis to lenders from outside the state.