Usury is the act of charging of an excessive interest rate on a loan. Each state has its own usury laws that determine the maximum rate of interest allowed on a loan.
Usury laws are complicated and have many exceptions. If you are making a loan or defending against allegations of usury, you should consult with an experienced financial attorney.
The History of Usury
Although usury now refers to charging excessive interest, originally, it referred to charging interest in any amount. Several major religions have histories of disallowing the charging of interests. Islam and some traditions of Christianity did not allow for the charging of interest, and Judaism did not allow for the charging of interest between a two Jewish people.
But did allow for it between a Jewish person and a non-Jewish person. In the past, as now, it usurious lending practices have often been used to take advantage or the poor.
What Makes a Transaction Usurious?
Currently, in the U.S., usury is regulated by individuals states. However, in general, for a transaction to be usurious:
- The transaction must be a loan;
- The interest must exceed the statutory maximum, usually between five and 20%, depending on the state;
- The loan and interest must be absolutely repayable by the borrower; and
- The lender must willfully intend to enter into a usurious transaction.
To violate the usury laws, the lender does not need to knowingly charge a higher interest rate than the law allows. A lender need only intend to take the amount of interest he or she actually receives. Usurious lenders are often referred to as “loan sharks.”
The practice of making usurious loans is also known as “predatory lending.” Courts won’t allow these types of lenders to recover the money they say they are owed when they have charged excessive rates.
The maximum loan rate in a state may depend on whether or not the loan was agreed to in writing. Even if there is a written agreement, the state usually still set a maximum interest rate, but it may be higher than the state’s general rate for unwritten agreements for loans.
Some states also require that lenders be licensed, and it can depend on the nature of the loan, the amount of interest charged, and the amount of the loan. Make sure you check your local state laws before you enter a loan or give one out.
What are the Exceptions to Usury?
There are many exceptions to usury. Some of these exceptions are:
- Bona fide credit sales where the buyer agrees to pay the amount due at a later date;
- Late charges;
- Transactions where the seller finances the purchase of property and charges a premium for providing the financing;
- Loans made by licensed pawnbrokers within the scope of the license;
- Payday loans made by licensed payday lenders;
- Real estate loans arranged by licensed real estate brokers, secured by a lien on real property; and/or
- Loans made to carry out a joint venture between lender and borrower.
It is also important to note that for a transaction to be usurious, the lender must have an absolute right of repayment. If the lender risks losing all or part of the amount given, he or she may transact for a higher rate of return than usury laws permit.
Maximum Interest Rate by State in Absence of Written Agreement:
Each state sets its own maximum interest rate.
- Alabama: 6%
- Alaska: 10.5%
- Arizona: 10%
- Arkansas: 17%
- California: 7%
- Colorado: 45%
- Connecticut: 12%
- Delaware: 5% over Federal Reserve discount rate
- Florida: Determined yearly.
- Georgia: 7%
- Hawaii: 10%
- Idaho: 12%
- Illinois: Determined by laws in effect at time contract is made.
- Indiana: 21%
- Iowa: 5%
- Kansas: 10%
- Kentucky: 8%
- Louisiana: 12%
- Maine: 6%
- Maryland: 6%
- Massachusetts: 6%
- Michigan: 5%
- Minnesota: 6%
- Mississippi: 8%
- Missouri: 9%
- Montana: 6% above Federal Reserve’s prime rate
- Nebraska: 6%
- Nevada: prime rate of largest Nevada bank plus 2%
- New Hampshire: 10%
- New Jersey: 6%
- New Mexico: 15%
- New York: 16%
- North Carolina: 8%
- North Dakota: 6%
- Ohio: 8%
- Oklahoma: 6%
- Oregon: 9%
- Pennsylvania: 6%
- Rhode Island: 12%
- South Carolina: 8.75%
- South Dakota: 15%
- Tennessee: 10%
- Texas: 6%
- Utah: 10%
- Vermont: 12%
- Virginia: 8%
- Washington: 12%
- West Virginia: 6%
- Wisconsin: 5%
- Wyoming: 7%
Is There Any Federal Regulation of Usury?
While there are currently no federal statutes enacted regarding usury between private parties, the United States Supreme Court has issued decisions which might make it possible for Congress to do so, via the Interstate Commerce Clause found in Article I of the United States Constitution.
What are the Remedies for Usury?
A victim of usury may sue to recover the total interest paid. In many states, the borrower may also bring a claim to recover treble—or a multiple—of the amount of interest paid. The treble amount recoverable is based on total interest paid, not only the total interest paid over and above the legal limit.
A lender may not sue to recover interest on a usurious loan. However, after the deadline to repay the principal has passed, the lender is entitled to a return of the principal. If the debtor fails to repay the principal by the deadline, the lender may recover interest on the principal from the date the principal became due, until judgment, at the legal rate.
Should I Contact an Attorney for Usury?
If you are facing charges of urusry or believe you are at the mercy of a usury lender, then be sure to check your state and local laws on usury to find out if what you are experience is legal. If it is illegal and violates your state’s usury law, then be prepared for the next step.
Because usury laws are complex and have many exceptions, if you deal in loans or business transactions, you should seek the advice of an experienced business lawyer.