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Usury Laws: Definition, Purpose Regulation and Enforcement

By Will Kenton

Updated July 18 2022

Reviewed by Thomas Brock

The truth is verified by Hans Daniel Jasperson

How Are Usury Laws?

Usury laws are regulations governing the amount of interest that may be charged on a loan. These laws target specifically those who charge excessively high rates on loans by establishing caps on the maximum amount of interest that could be levied. These laws are intended to protect the consumer.

The United States, individual states are accountable for establishing their individual usury laws.1 While this kind of financial transaction could fall under the Commerce Clause of the Constitution, Congress has not traditionally been concerned with usury. The federal government has considered the collection of money through violent means as a federal offense.2

Important Takeaways

Usury laws set the amount of interest can be charged on many types of loans like credit cards or personal loans or payday loans.

Usury laws are mostly regulated and enforced by states, and not at a federal level.

Since the laws governing usury are set by the states, the laws vary depending the state you reside in; as a result, interest rates could be significantly higher in one state than the next.

Some banks charge the maximum rate allowed by the state where they are registered, as opposed to 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 usually benefit from being able to charge the interest rate permitted by the state where the company was established rather than follow the laws governing usury in the states where the borrowers reside. Nationally chartered banks similarly can use the highest rate of interest permitted by the state in which the company was founded. When they incorporate in states such as Delaware as well as South Dakota, such lenders have historically benefited from greater leeway allowed by those states’ more relaxed laws on usury.

Delaware is a particular state that is often chosen for incorporation for a number of financial institutions due to the freedom allowed regarding the payment in interest charges. The majority of domestic credit business in the U.S. market is conducted by companies that have been incorporated in Delaware however, they can have their headquarters operating in other states.

Special Considerations

There is some debate on the effectiveness of usury laws following decisions made by the U.S. Supreme Court and legislation that gave financial institutions the power to circumvent the limits. The high court’s rulings in the case in the case of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers who were outside the state with the same interest rates the companies could charge in states where they were incorporated.3

Delaware’s adoption of the Financial Center Development Act, which largely eliminated limits in the state regarding fees and interest that can be charged on consumer lending which further increased the demand for financial institutions to relocate there.4 The banks simply needed to create subsidiaries or satisfy certain conditions for incorporation within the state to benefit from the law, and thus avoid usury laws in other states. To counter this activity some states also changed their usury laws to give local-based banks the right to charge interest rates at a par with out-of-state lenders.