Usury Rate: Meaning, Assessment, Example

Ariel Courage is an experienced editor, researcher, and former fact-checker who has worked for leading finance publications like The Motley Fool and Passport to Wall Street.

What Is a Usury Rate?

A usury rate refers to interest that is considered excessive compared to prevailing market rates. It is often associated with unsecured consumer loans, specifically those for subprime borrowers.

Key Takeaways

• Usury rates are excessively high interest rates that are often illegal.
• They are associated with predatory lending practices, which are illegal in many states and countries.
• Within the United States, usury rates are defined at the state level, as there are no federal guidelines on maximum interest rates.
• Usury rates typically apply to consumer loans, with different rules for other types of debt like credit cards.
• Distinguishing between usury rates and high interest rates to compensate for lending risk can be challenging.

Understanding Usury Rates

Usury was historically used to describe all interest-bearing loans. In modern usage, it specifically refers to loans with high interest rates, which are now called usury rates.

The Federal Deposit Insurance Corporation (FDIC) associates usury rates with predatory lending, where unfair or abusive loan terms are imposed on borrowers. Predatory lenders target demographic groups with limited access to affordable financing.

Religious Responses to Usury

Usury Laws by State

Usury laws and high interest rates are determined by state legislation. Each state can set its own requirements:

Washington: Lenders may charge interest greater than 12% per year if agreed to in writing.

North Dakota: The usury rate is 5.5% higher than the cost of money based on the interest rate of U.S. Treasury Bills maturing within six months, with a minimum of 7%.

Missouri: The usury rate is the greater of the market rate or 10%, with second mortgage interest rates deregulated.

States can base usury rates on short-term U.S. Treasury Bill rates, long-term U.S. Treasury Bill rates, the U.S. prime rate, fixed rates, or written agreed rates.

No federal regulation governs usury rates.

Usury Rate Applications

Usury interest rates primarily apply to consumer loans, while other forms of debt like credit card debt, retail installment contracts, and consumer leases are often exempt.

Credit cards are a notable exemption. Bank of America, for example, charges variable APR rates ranging from 15.49% to 25.49% after the introductory offer ends.

Usury laws may not restrict business contracts performed within a state.

Assessing Usury Rates

Determining the difference between usury rates and high interest rates can be challenging. Payday lenders, accused of being predatory, argue that their high rates compensate for the high risk they face. Organizations like TreasuryDirect and The Wall Street Journal provide updates on interest rates, helping consumers gauge reasonableness.

Consumers can determine whether loan rates are excessively high by researching lenders and comparing prices, similar to any free market where buyers choose products based on their own assessments. Usury rates have existed for centuries, indicated even in the Code of Hammurabi.

Example of Usury Rate

James, a first-time homebuyer with a low credit rating, seeks mortgage financing. Mainstream banks refuse due to his credit history. Therefore, James explores alternative financing options.

What Is a Usury Interest Rate?

A usury interest rate is an illegally high interest rate. To discourage predatory lending and encourage economic activity, states enact laws setting a ceiling on interest rates for specific types of debt. Rates above the ceiling are considered usury and are illegal.

What’s The Maximum Interest Rate Allowed By Law?

The maximum interest rate varies by state, with some states lacking rate limits for certain loans. Some states have more lenient restrictions. For example, New Mexico has proposed reducing the APR on loans up to $5,000 from 175% to 36%.

Why Are Usury Interest Rates Illegal?

Usury rates are considered predatory loans, taking advantage of borrowers. Usury laws protect consumers while allowing lenders to earn a profit and recover risk. They also encourage business transactions and prevent loan price gouging.