Understanding Usury Laws and How They Apply to Interest Rates

By: , Contributor

Published on: Feb 27, 2020

Understanding usury laws makes you an informed and protected borrower or lender.

Do you ever wonder how certain loans, like credit card loans or hard money loans, are able to charge such high interest rates? Usury laws define the maximum interest rate that can be charged to borrowers, depending on the types of loans they are receiving. These laws vary from state to state, which is why a loan in Kansas can have an interest rate of up to 15%, but in Maryland, the interest rate cannot exceed 8%.

If you borrow money or create private real estate loans, learn what usury laws are, why they are important, what type of credit usury laws apply to, how they vary from state to state, and the penalties of violating usury laws to help you avoid getting a predatory loan or becoming a loan shark.

What are usury laws?

Usury laws are regulations that designate the maximum allowable fees and interest a creditor can charge a borrower, which will vary based on the amount of money a creditor is lending, the type of loan, and the state the credit is being issued in.

Usury laws have been cited in historical texts and religious texts for thousands of years, dating back to the Babylonian era. Today these laws are typically defined and regulated at a state level, although they can be regulated on a federal level through the Federal Reserve Board as well.

What type of credit do usury laws apply to?

Usury laws provide specific guidance for allowable rate limits based on the following factors:

  • The amount of the loan.
  • The type of creditor.
  • The loan type.

Each state is allowed to dictate what type of loans the usury laws are applied to. Below are a few examples of what they typically do and don't apply to. Always check your state's law to see the specific limits and restrictions.

What Usury Laws Typically Apply To What Usury Laws Typically Don't Apply To

• Loans without a written agreement from nonbanking institutions.Loans with a written agreement (such as mortgages, personal loans, or business loans) from a nonbanking institution.

•Contracts from nonbanking institutions (such as an agreement for deed or contract for deed).

• Certain payday loans.Private student loans.

• Agricultural, investment, commercial, and business loans.

• Credit cards

• Loans from banking institutions.

• Lines of credit such as a home equity loan or subordinate mortgage.

• Delinquent property taxes.

There have been instances in which the issue of usury laws' interest rates have been taken to court. Credit cards, known for their notoriously high interest rates, were removed from usury law restrictions in the 1978 U.S. Supreme Court ruling Marquette National Bank of Minneapolis vs. First of Omaha Service Corp., which allows credit card companies and certain banks to charge rates far higher than the state usury statutes allow.

How do usury laws vary from state to state?

The goal of usury laws is to keep creditors in check, limiting the amount of interest or fees that can be charged in hopes of better protecting borrowers from excessive or predatory lending practices. However, since the laws vary by state, with protections and limits dramatically differing from one state to the next, usury laws can be complicated to navigate.

For example, Vermont's usury law Section 9 V.S.A. § 41a states that for single-payment loans by lenders regulated by Title 8 and federal savings and loan associations, the finance charge shall not exceed 18% per annum, but a retail charge can go as high as 21% per annum.

Additionally, the allowable interest varies as follows based on the loan amount, as with an installment loan: The interest rate shall not exceed 24% per annum on the first $1,000 of the aggregate balance outstanding and shall not exceed 12% per annum of the aggregate balance outstanding in excess of $1,000, or 18% annual percentage rate on the aggregate balance outstanding, whichever is higher.

What are the penalties for violating usury laws?

Penalties for violating usury laws will vary by state, but typically the penalty is severe. Depending on the severity of the case, the penalty may require the bank or lender to return all interest charged from the borrower, with additional fees that can be double or triple the original interest charge with added assessment fees, or possibly serve jail time.

Why are usury laws important?

If you are a borrower, it's important to know what the usury law is for your state and type of loan to ensure you are being adequately protected and your loan falls within the allowable law. The loan should abide by the laws of the state in which you lived at the time the loan was originated.

If you are a bank, creditor or private real estate lender, it's important to know what the usury laws are for your state and type of loan to ensure you are following the allowable limits within the law, reducing your exposure to litigation and keeping yourself compliant.

Usury laws may not seem exciting, but understanding what usury laws are as well as how they relate to you as a borrower or a private lender is important. It ensures you are being protected adequately as a borrower or that you are creating a loan that follows state laws.

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