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Table of Contents

How Is Usury?

Understanding Usury

Usury Laws and Predatory Lending

Example of Usury

FAQs on Usury

Personal Finance Loans

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

By Julia Kagan

Updated February 07, 2022.

Reviewed by Thomas Brock

How Is Usury?

Usury is the act of lending money at an interest rate that is thought to be unreasonably high or higher than the amount allowed by law. The practice first came into use in England under King Henry VIII and originally pertained to the charging of any interest on loans. In time, it changed to refer to charging excessive interest however in certain religions and areas of the world charging any interest is considered illegal.1

Key Takeaways

Usury is the act loaning money at a rate which is thought to be unreasonably high or that is higher than the rate permitted by law.

It was first introduced in England under King Henry VIII.

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

Today, the laws on usury protect investors from lenders who are predatory.

States set their own rules for usury, and as a result, each state has different usury interest rates.

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Understanding Usury

The practice of charging interest on loans is not a new concept, but in 16th-century England there were restrictions imposed on the amount of interest that one could legally charge on a loan. In the past, however certain religions have stayed away from usury altogether as the idea of charging interest was against their core principles.

Given that the first lending was made in small groups and between individuals unlike the modern banking system used in the present, setting strict guidelines for lending conditions was considered to be crucial.

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

In particular, Judaism, Christianity, and Islam (the three Abrahamic faiths) take a very strong stand against usury. A number of passages in the Old Testament condemn the practice of usury, especially when lending to less wealthy people who do not have access to secure sources of funding. In the Jewish community, this was the reason for the rule of lending money at interest only to non-natives.

The Old Testament’s prohibition of usury also led to the Christian tradition against money lending. A few Christians believe that people who lend shouldn’t be expecting anything in return. The Protestant Reformation in the 16th century created a distinction between usury (charging high-interest rate) and the more acceptable loan of money with low interest rates. Islam on the other hand has never distinguished between the two, however charging interest is not allowed within the Islamic faith.

Regulations on Usury and Prior Lending

Today, the laws on usury protect investors from lenders who are predatory.

Predatory lending is described by FDIC in the sense of “imposing unfair and abusive loan conditions on the borrowers.” Predatory lending typically targets people that have less access to or understanding of more traditional types of financing. These lenders may charge unreasonable high interest rates and demand substantial collateral in the unlikely event a borrower defaults.2

Predatory lending may also be associated to payday loans, also termed payday advances or small-dollar loans, among other names. Payday loans are short-term, low-cost, unsecured loans, which can appear to pose a substantial risk to the lender. To stop usury, certain areas limit an annual percentage (APR) that payday lenders are allowed to charge, while some ban the practice completely.

Usury laws are determined by state laws and differ from state to state. The rate that is permissible by state laws on usury is based on the amount of the loan, the type of person or entity that is making the loan and also the type of loan. Usury laws do not have to be applied to all loans but only to certain types as determined as necessary by state law.

The types of loans that are subject to laws on usury are those with no written agreement from an institution that is not a bank, loans with a written agreement with a non-bank institution and private student loans, payday loans, and any other types of agreements with institutions that are not banks.

Credit cards have very high interest rates but 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 in each state the penalties for breaking usury laws vary. The penalties could include the obligation for the lender to return all interest on the loan to the borrower of the time with additional fees in addition. The fees typically amount to more than the interest that the creditor would have received. Violators may also be liable to prison time.

A good example of Usury

John has no job and does not have health insurance. He injures himself while fixing his roof, which results in medical bills that cost him $10,000. John is able to cover $2,000 from his savings but does not have the remainder in cash to pay for his medical bills. John asks his family and friends to lend him money but they do not have cash.

In a state of stress, John borrows money from a friend of a friend whom he does not know well. The creditor loans him the amount of $8,000 and charges him the interest at 18% per month. The state in which John lives has a usury law in place that limits the interest rate to 9 percent. In this instance the creditor is allegedly charging John usury and is in violation state law.

Is Usury a crime?

Usury is usually a crime but can be considered a violation. The federal government, along with every state, has its specific laws on usury that specify the maximum interest rate that is allowed on specific types of loans. If a creditor is charged more than this, they’ll be in violation of the law and be held responsible for a violation of the law on usury.

What Is the Current Usury Rate?

Every state sets its own usury rate and how it is calculated. For instance, the present usury rate in North Dakota is the “maximum rate of interest which may be charged on loans of funds by lenders that are not regulated and is up to 5.5% higher than the current cost of money, as indicated by the average rate of interest payable for U.S. Treasury Bills maturing within six months; but in any event the maximum permitted interest rate cannot exceed 7%.. “4

When Did Usury When Did Usury Become Illegal?

Usury has a long history. It was made illegal to stop individuals from predatory loan methods; instances where people have to borrow money, but are being charged high interest rates and often have difficulty paying back the loan which can result in financial ruin. It is also prohibited in some religions, which has affected its legality in society.

Do Usury Laws apply to private Loans?

Yes, laws governing usury cover private loans. The majority of loans taken out of a banking institution are subject to laws governing usury to prevent fraudulent lending practices.