Usury laws protect borrowers in many states and some borrowers nationwide from being charged excessively high interest rates. However, state standards for excessive interest vary widely, and federal banking laws let credit card issuers, among others, charge essentially whatever the traffic will bear. Also, usury laws don’t apply to many loans, allowing some types of lenders in some states to collect annual percentage rates of more than 500%. Meanwhile efforts to enact a national usury law have fallen short, but many states are capping some loan rates at 36%.
Discussing your borrowing plans with a financial advisor can help you avoid being stuck with a high-interest loan.
Protecting borrowers from too-high interest rates is a concern of many human cultures going far back into history. In some places and times, receiving any interest at all for lending money is considered usury. More commonly, however, usury laws set a maximum interest rate that can be charged on loans.
In the United States, the federal government has largely left usury laws to the states. All but a few states have some sort of upper limit lenders can charge for loans. Often the top legal rate is a simple interest rate, but sometimes it is an annual percentage rate that includes the costs of fees as well as interest. Usury loans may allow for canceling loans above the legal limit, and lenders who cross the line may also face fees and jail time.
State usury limits vary widely. The Center For Responsible Lending, an advocacy organization, says effective usury rules on loans of $300 or less exist in 19 states: Arizona, Arkansas, Colorado, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Dakota, Vermont and West Virginia.
Many of these states have capped interest at 36% as well as providing other protections. Some of the rest offer limited protections such as keep effective rates at or below 200% annually. Those with few or no borrower protections include Nevada and Texas, where the Center for Responsible Lending says annual percentage rates (APRs) may top 600%.
State laws change frequently and the general trend lately has been toward tighter usury prohibitions. Rhode Island, for example, adopted a 36% cap in 2022.
Usury Law Limits
Laws on usury are complex with many loopholes. Usury laws generally affect only specific types of loans, usually small short-term payday loans, leaving rates for other loans unaffected. In California, for instance, a 36% cap applies only to loans from $2,500 to $9,999, freeing payday lenders to charge more.
Credit cards represent one of the most notable exemptions. That’s because a 1978 court decision let card issuers charge every cardholder the highest rate allowed in the state where the issuer was based. That included borrowers in states where usury laws set lower standards. After that decision, South Dakota and Delaware removed interest rate caps, prompting many major card issuers to move their headquarters to those states.
State usury laws also don’t apply to federally regulated banks, credit unions, finance companies and pawnshops. And the only national federal usury law only covers loans to military service members. The National Credit Union Administration currently does bar its members from charging more than 18% percent interest on most loans, but they can still charge higher payday loan rates.
With all the exemptions, usury laws don’t apply to most loans from most lenders for most borrowers. They do apply to interest-bearing loans between family and friends, however. Unless you’re a licensed lender such as a bank or pawnbroker, check your state’s usury laws before lending money to a family member or friend at a rate above 10%, which is the point where some state usury laws could come into play.
Usury Laws’ Future
Legislative efforts in recent years to extend the military service members’ usury protections have stalled in Congress. Payday lenders argued that APR-based usury limits shouldn’t apply to the very short-term loans they issue, which often get most of their income from fees rather than simple interest.
After the federal usury initiative failed, many states began instituting 36% caps on payday-type loans. This group included previous usury-free states such as South Dakota and Delaware. Today the trend is toward states adopting 36% caps. However, these still affect only a limited number of transactions, mostly small loans of a few hundred dollars.
The Bottom Line
State usury laws protect some lenders on some loans from charging excessive interest rates. However, many loans and lenders are not covered by the rate caps, allowing effective rates on payday loans to top 500% in some states. Backers of a national usury limit have been unsuccessful. But many states are acting to limit payday lenders to no more than a 36% annual percentage rate, including fees.
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- You can find out how much you’ll pay in interest for a personal loan by using SmartAsset’s free online interest rate calculator.
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