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March 4, 2023

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Usury Laws: Definition, Purpose Regulation and Enforcement

By Will Kenton

Updated on July 18 2022

Reviewed by Thomas Brock

Fact checked through Hans Daniel Jasperson

Which Are Usury Laws?

Usury laws are regulations governing what amount of interest may be assessed on the loan. The laws specifically target the practice of charging too high rates for loans by imposing limits for the amount that can be charged. These laws are designed to safeguard consumers.

The United States, individual states are in charge of deciding their individual usury laws.1 Though this type of financial activity may be a violation of the commerce clause of the Constitution, Congress has not traditionally focused on usury. The government does consider the collection of money through violent means as a federal offense.2

Key Takeaways

The law on interest rates sets a limit on how much interest can be charged on various loans including credit cards or personal loans, or payday loans.

Usury laws are mostly regulated and enforced by states, rather than on the federal level.

Since the laws governing usury are set by the states, laws differ based on the location you reside; as a result, interest rates may be drastically higher from one state to the next.

Some banks charge the maximum rate that is allowed in the state they are registered in, and not the state where you live–a practice that was made legal in 1978 following a U.S. Supreme Court ruling.

In What Ways Usury Laws Are Circumvented

Credit card companies generally have the benefit of being capable of charging interest rates that are regulated by the state in which the business was founded instead of adhering to the laws governing usury in the states where the borrowers reside. Nationally chartered banks can also apply the highest interest allowed by the state in which the company was founded. Through incorporation in states like Delaware as well as South Dakota, such lenders have historically enjoyed greater leeway allowed by those states’ more relaxed laws on usury.

Delaware specifically is frequently chosen to be the place of incorporation of many financial institutions because of the freedom allowed regarding the payment for interest rate. Around half of the credit activity in the U.S. market is conducted by firms that are were founded in Delaware however, they can maintain their operational headquarters in other states.

Special Takes into Account

There’s some controversy over the validity of the usury laws based on decisions of the U.S. Supreme Court and legislation granted banks the ability to bypass the restrictions. The Supreme Court’s rulings on the matter of Marquette National Bank v. First of Omaha Corp. allowed credit firms to charge customers who were outside the states at the same rates that they could charge in the states where they were incorporated.3

Delaware’s introduction of the Financial Center Development Act, which largely eliminated limits on fees and interest that can be charged on consumer lending, further amplified the desire among financial institutions to move there.4 Banks simply had to establish subsidiaries or meet the other requirements for incorporation in the state in order to take advantage of the law, and thus avoid the laws governing usury in other states. In response to this some states also altered their usury laws to grant locally-based financial institutions the ability to charge interest rates on a level with lenders outside of the state.

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