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Usury Laws Definition, Purpose, Regulation, and Enforcement

By Will Kenton

Updated July 18 2022

Review by Thomas Brock

The truth is verified through Hans Daniel Jasperson

Which Are Usury Laws?

Usury laws regulate the amount of interest that can be charged on a loan. These laws target specifically those who charge too high rates for loans by establishing caps in the highest amount of interest which can be levied. These laws are intended to protect consumers.

Within the United States, individual states are in charge of deciding their individual usury laws.1 While this kind of financial activity could be a violation of the Constitution’s commerce clause, Congress has not traditionally been concerned with usury. The federal government has considered the collection of usury through violent means as a federal offense.2

The most important takeaways

Usury laws set a limit on how much interest can be charged on many types of loans, such as credit cards or personal loans, or payday loans.

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

Since the laws governing usury are set by states, the laws differ based on where you live which means that interest rates can be dramatically different from one state to the next.

Some banks will charge the maximum rate allowed by the state they are registered in, and not the state in which you reside. This is a procedure that was made lawful after a 1978 U.S. Supreme Court ruling.

How Usury Laws Are Circumvented

Credit card companies generally enjoy the advantage of being able to charge the interest rate regulated by the state where the business was founded rather than relying on the usury laws that apply to the states in which the borrowers live. Nationally chartered banks also have the ability to apply the highest interest allowed by the state where the company was founded. By incorporating in states such as Delaware and South Dakota, such lenders have historically enjoyed greater leeway allowed by those states’ usury laws that are more flexible.

Delaware specifically is often chosen as the state of incorporation of many financial institutions due to the flexibility that is granted to the charging for interest rate. About half of the domestic credit business in the U.S. market is conducted by firms that are have been incorporated in Delaware however, they can keep their operations in other states.

Special Takes into Account

There is some debate on the effectiveness of usury laws following decisions made by the U.S. Supreme Court and legislation that gave banks the ability to bypass the restrictions. The high court’s rulings on the matter of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers who were outside the states at the same rates they were able to charge in states where they were incorporated.3

The Delaware’s introduction to the Financial Center Development Act, which substantially eliminated restrictions in the state on fees and interest that can be charged to consumers who lend which further increased the demand of financial institutions to establish a branch there.4 Banks only had to establish subsidiaries or meet certain conditions for incorporation within Delaware to be eligible for the law and thereby circumvent usury laws in other states. In response to this move, some other states changed their usury laws to give local-based banks the right in charging interest at a par with out-of-state lenders.