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March 6, 2023

by adelaidegay

Table of Contents

How Is Usury?

Understanding Usury

Usury Laws and Predatory Lending

Example of Usury

FAQs about Usury

Personal Finance Lending

What Is Usury? Definition, How It Works, Legality, and Example

By Julia Kagan

Updated February 07, 2022.

Reviewed by Thomas Brock

How Is Usury?

Usury refers to the act of loaning money at a rate that is thought to be unreasonably high or higher than the maximum rate allowed by the law. Usury first became common in England under the reign of King Henry VIII and originally pertained to charging any amount of interest on funds that were loaned. As time passed, it grew to include charging interest that was excessive but in some religions and parts of the world, charging interest is thought to be illegal.1

Key Takeaways

Usury refers to the act of lending money at an interest rate that is considered unreasonably high or higher than the rates permitted by the law.

It was first introduced within England during the reign of Henry VIII, the King of England. Henry VIII.

Judaism, Christianity, and Islam particularly take a strong stance against usury.

Today, usury laws help to protect consumers from predatory lenders.

States have their own rules for usury, and, as a result states have different usury interest rates.

Loan Shark Definition

Understanding Usury

Interest in loans is not a new concept however, in the 16th century England the law imposed restrictions on the amount of interest can be legally charged on the loan. However, throughout history certain religions have stayed away from using usury completely since charging interest went against their core principles.

Given that the first lending was made between individuals and small groups, in contrast with the banking system that is used in the present, setting strict social norms for lending terms was considered vital.

High interest rates on credit cards are one of the primary reasons for high consumer debt levels in the U.S.

In particular, Judaism, Christianity, and Islam (the three Abrahamic faiths) have a strong stand against usury. Many passages from the Old Testament condemn the practice of usury, especially when it comes to lending to people who do not have access to secure means of financing. In the Jewish community, this created the practice of lending money at a rate of interest only to non-natives.

The Old Testament’s condemnation of usury was also the basis for the Christian custom of not lending money. Certain Christians believe that those who lend should not have any expectation of remuneration. The Protestant Reformation in the 16th century created a distinction between usury (charging high interest rate) in contrast to the less shady lending of money at low-interest rates. Islam however, on the other hand, has historically not established this distinction, however it is not permitted to charge interest in Islam.

Usury Laws and Predatory Lending

Today, the laws on usury safeguard investors from predatory lenders.

Predatory lending is identified by FDIC in the sense of “imposing unfair and abusive loan conditions on the borrowers.” The majority of predatory lending is targeted at groups that have less access to or knowledge of the more conventional forms of financing. The lenders who are predatory can charge astronomically high rates of interest and require substantial collateral in the unlikely event a borrower defaults.2

Predatory lending can also be associated with payday loans, also termed payday advances or small-dollar loans and many other names. Payday loans are small-sum, short-term unsecured loans which could appear to pose a substantial risk to the lender. To stop usury, certain states restrict the rate of annual percent (APR) that payday lenders can charge, while other states ban the practice completely.

The laws governing usury are set by the state , and they differ from state to state. The rate that is permitted by the state’s usury laws depends on the size of the loan as well as the kind of individual/entity making the loan and also the type of loan. The laws on usury don’t have to be applied to all loans however they do apply to specific ones as deemed to be appropriate by the government.

The kinds of loans that are subject to laws on usury include those where there is no written agreement from an institution that is not a bank, loans with a written agreement from a non-bank institute or loans for private students, loans, payday loans, and all other kinds of agreements with banks that do not have a bank.

Credit cards have very high rates of interest, however credit cards don’t fall under usury laws as determined by an U.S. Supreme Court ruling ( Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.) in 1978.3

Penalties for Usury

Since usury laws are formulated individually by states The penalties for violating usury laws can differ. The penalties can include the obligation for the lender to return all interest on the loan to the borrower most frequently with additional charges added on. The fees typically amount to greater than what rate the creditor could have earned. Violators may also be subject to jail time.

An example of Usury

John has no job and does not have health insurance. He is injured while fixing his roof, which results in medical bills that cost the client $10,000. John can pay $2,000 from his savings account, but does not have the remainder in cash to cover the medical expenses. John asks family members and friends to borrow money, but none have available cash.

In a state of stress, John borrows money from the friend of a person whom he does not know well. The lender loans him $8,000 and charges him an interest of 17% a month. The state where John lives has a law on usury which limits rates of interest to nine percent. In this instance the creditor is charging john usury and is in violation of the law of the state.

Is Usury an offense?

Usury is typically an offense, but it can also be considered a violation. Federal government along with each state, has their own usury laws, stating the maximum rate of interest that is allowed on specific types of loans. If a lender charges more than this, they will be in violation of the law and be held accountable for violation of the usury law.

What is the current Usury Rate?

Each state specifies the rate of its own usury and the method of calculation. For instance, the present Usury rates is in North Dakota is the “maximum rate of interest that can be charged on loans of funds by non-regulated lenders and is equal to 5.5 percent higher than the current cost of money as reflected by the average interest rate payable on U.S. Treasury Bills maturing within six months. However, in any event the maximum allowed interest rate ceiling may not exceed 7%.. “4

What was the date that Usury Become Illegal?

It has a long and rich history. It has primarily become illegal to stop individuals from taking advantage of predatory loan methods; instances in which people need to borrow money, but are being charged high interest rates, often resulting in difficulties in repaying the loan with interest and/or financial ruin. It is also prohibited in all religious traditions, which has affected its legality in society.

Do Usury Laws Apply to Private Loans?

Yes, the laws on usury do apply to private loans. Most loans that are made without a banking institution are subject to laws governing usury to stop unfair lending practices.

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