What is Usury?

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Definition:

Usury is when a lender charges an unreasonably or illegally high interest rate.

🤔 Understanding usury

Lenders usually charge interest to people who borrow money. The rate can vary based on the amount you borrow, the collateral you put up, and your credit history. Even for borrowers with bad credit, there are limits on how high interest rates can go for many types of loans. When a lender charges an unreasonable or illegal rate of interest, it’s called usury. Many of the world’s major religions have condemned usury, or charging any interest at all. In the US, federal and state laws define and prohibit usury.

Example

A man in Michigan applies for a personal loan. The lender offers him a loan with an interest rate of 10%. This is higher than the legal interest rate limit in Michigan, which is 7% when loan terms are in writing (or 5% when they aren’t). That makes the rate illegal and an example of usury.

Takeaway

Usury is like overcharging for something at a store…

When you go to the convenience store to buy milk, you expect to pay a reasonable price. Depending on where you live, a gallon of milk might cost about $3, but you could reasonably pay $4 or $5 if you’re at a convenience store, at a remote location, or buying fancy milk. If someone tried to charge $30 a gallon, you’d likely find that unreasonable. Usury is similar. Borrowing money has a cost, but charging far more than is reasonable constitutes usury.

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What is usury?

Usury is when a lender charges an unreasonably excessive interest rate for a loan. Several major world religions have historically decried usury, or even charging interest at all. In the US, federal and state laws define interest rate limits.

When someone takes out a loan, they usually have to pay a cost for borrowing the money. Almost all loans charge interest, which is a percentage of the loan amount. Sometimes, the borrower also has to pay other expenses, like origination fees.

Depending on the type of loan and the borrower’s credit history, loans can carry a range of interest rates. Mortgages for people with excellent credit might come with interest rates below 4%, while credit cards for consumers with poor credit might charge 25% or more.

It’s like buying a product at different retailers. It might cost $1 to buy a soda at a grocery store and $2 to buy it at a convenience store. It’s more expensive, but there’s a reasonable explanation for it.

If someone tried to charge you $50 for one bottle of soda, you’d find that completely unreasonable. In the same way, if someone wanted to charge 200% interest for a personal loan, you’d probably think they were trying to scam you.

How does usury work?

Usury is just charging interest on a loan — except the rate exceeds reasonable or legal limits.

For example, if you borrow $100,000 for 10 years at an interest rate of 6%, compounded monthly, you could expect to pay $1,110.21 per month or a total of $133,224.60 throughout the life of the loan. (You can use a debt repayment calculator to figure this out.) Most people would consider this a reasonable rate of interest, and it falls below the limits set by most laws.

If the same loan charged 50% interest, many jurisdictions would consider it usurious. Instead of paying $1,110.21 each month, you’d have to pay $4,197.97, which comes to $503,756.37 in total.

Usury laws help protect consumers from unreasonably expensive loans that might trap them in a cycle of debt.

What is the difference between a reasonable interest rate and usury?

The difference between a reasonable interest rate and usury is one of magnitude. Lenders are allowed to charge interest on the loans they offer consumers — In fact, they typically have to in order to stay in business. Interest helps pay for operating costs, makes up for the opportunity cost of lending out the money, and partly compensates for the risk that a borrower will fail to repay a loan.

Usury occurs when a lender charges interest rates that exceed a reasonable or legal limit. There is no set definition of what rate constitutes usury. People may have different ideas of what rates are unreasonable.

Legally speaking, various US states set different limits, which can also vary based on contract terms, the parties involved, and other factors. For example, while Michigan sets the limit at 7% for written loan contracts, Connecticut sets the ceiling at 12% for nearly all loans.

Do usury laws apply to individuals?

In general, usury laws do apply to loans between individuals. States typically offer exemptions only to licensed lenders, specific businesses, and for particular types of loans.

For example, California exempts licensed lenders whose primary business is lending money to consumers and businesses, like banks and credit unions. Certain real estate loans, credit card companies, some pawnbrokers, and loans to certain types of businesses also receive exemptions.

If you’re making a personal loan to another individual, state usury laws likely apply. Before you lend money to anyone, you may want to check local laws to ensure that you meet all of the requirements for lending and charge a permissible interest rate. If you intend to borrow money from an individual, it may be worth checking that the interest rate is legal.

Is usury a crime?

Usury can be a crime, or it can be a civil violation.

In order to protect consumers, many states have usury laws that limit the interest lenders can charge. For example, Florida considers annual interest rates higher than 18% usurious, while Massachusetts sets the limit at 20%.

The federal government also has a usury rate that applies to certain types of loans. The limit is 7%, or 1% more than the discount rate on 90-day commercial paper (a type of unsecured, short-term debt) at the Federal Reserve Bank in the lender’s district — whichever is greater. This limit applies only if the state, territory, or district where the lender is located doesn’t set its own limits.

Many states have usury laws that specify maximum interest rates lenders may charge and outline the penalties for breaking those limits. Depending on the jurisdiction, the lender may have to pay fines, invalidate the loan, refund the borrower, or even face time in jail. States may also exempt certain types of loans or lenders.

For example, in Massachusetts, someone who breaks usury laws may face a fine of up to $10,000, spend up to 10 years in prison, or both. Even people who assist a lender breaking usury laws, for example by working as a bookkeeper, could face shorter jail time and fines. The court can also invalidate usurious loans.

The best way to learn about the penalties for usury where you live is to check with your local and state governments. Laws can vary widely from one jurisdiction to another.

What is the penalty for usury?

The penalty for usury differs from one jurisdiction to another.

Typical penalties can include:

  • Fines
  • Repayment of interest, plus penalties, to the borrower
  • Invalidation of illegal loans
  • Jail time for lenders

For example, someone who breaks the federal usury law must return two times the amount of interest received from the borrower (as long the borrower takes action within two years).

Penalties for breaking state laws vary. In California, people who violate usury laws must refund triple the amount of interest they received and may face up to five years in prison.

To find out the penalty for usury in your area, you may want to check your local jurisdiction’s laws.

Many jurisdictions also have a statute of limitations after which the person charging usurious rates cannot be punished. For example, the federal statute of limitations is two years.

Which religions have rules against usury?

Usury laws are some of the oldest laws around. Religious texts that are thousands of years old have rules about charging interest on loans.

In Christianity, the Bible repeatedly cautions against the “love of money” and advises followers to place God and others above money. The Book of Proverbs explicitly warns Christians that “He that by usury and unjust gain increaseth his substance, he shall gather it for him that will pity the poor.” In short, profiting from the poor by charging interest is wrong, so do not charge excessive or unfair amounts of interest.

Judaism also has rules against usury. Some Jewish religious texts seem to say lenders should only avoid charging interest to the poor, while others suggest they can only charge interest to foreigners.

The Quran forbids Muslims from charging or paying interest on loans. These prohibitions have led to the rise of Islamic banks around the world that follow religious rules.

The interpretation of these religious texts is up for debate, and the influence of these rules on modern followers varies. Many scholars argue that these rules intended to encourage a healthy society based on community and to discourage profiteering and inequality.

What is the current usury rate?

The federal usury rate is at least 7%. If the rate on 90-day commercial paper (a government security) exceeds 7%, the usury rate is 1% more than the discount rate on 90-day commercial paper at the Federal Reserve Bank in the lender’s district. At the state level, usury rates can vary widely. For example, Nebraska limits interest rates to a 16%, while Oregon sets the usury rate at 9% for some loans and 12% for others. Some state usury laws have many exceptions, so you may want to look at the details.

For example, Washington exempts agricultural, investment, and business loans; credit cards and retail installment debts; consumer leases of 4 months or more; national banks; most mortgages; loans up to $700; and several other loans from its usury laws. The state also sets separate rates for certain kinds of loans. Unpaid child support charges 12% per year, while judgments for negligent conduct can charge the 26-week Treasury bill rate plus 2%.

If you think you may have borrowed money from a lender charging a usurious rate, check the details of the loan to figure out which laws apply.

If you think that the rate is illegally high, you may want to ask a legal professional for advice. An attorney can help you navigate the complicated system of exemptions and the interplay between federal and state law. If the loan is illegal, you may be able to help get some of your money back (or more), get out from under the loan, or reduce your interest rate.

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