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Table of Contents

How Is Usury?

Understanding Usury

The Usury Laws as well as Predatory Lending

An example of Usury

FAQs on Usury

Personal Finance Loans

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

By Julia Kagan

Updated February 07, 2022.

Review by Thomas Brock

How Is Usury?

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

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

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

Today, laws governing usury help safeguard investors from predatory lenders.

States set their own usury laws and, as a result, each state has different usury interest rate caps.

Loan Shark Definition

Understanding Usury

Charging interest in loans is not new however, in the 16th century England there were restrictions imposed in place regarding the interest that you could charge legally on an loan. In the past, however certain religions have stayed away from using usury completely since the idea of charging interest was against the fundamental principles they abide by.

Since earlier lending was conducted between individuals and small groups as opposed to the banking system of today, establishing strict social norms for lending terms was considered essential.

Credit cards with high rates of interest cards are one of the main reasons for the large levels of consumer debt in the U.S.

Particularly, Judaism, Christianity, and Islam (the three Abrahamic religions) adopt a firm stand against usury. Many passages from the Old Testament condemn the practice of usury, particularly when it comes to lending to individuals without access to more safe ways of financing. In the Jewish community, this was the reason for the rule of lending money with interest only to non-natives.

The Old Testament’s prohibition against usury also led to the Christian tradition of not lending money. Certain Christians believe that the people who lend money should not be expecting anything in return. The Protestant Reformation in the 16th century brought about a distinction between usury (charging high-interest rates) as well as the acceptable lending of money at low-interest rates. Islam however, on the other hand has never distinguished between the two, however charging interest is not allowed within the Islamic faith.

Usury Laws and Predatory Lending

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

Predatory lending is broadly described by FDIC as “imposing unfair and excessive loan terms on customers.” Predatory lending often targets groups that have less access to or knowledge of the more conventional methods of financing. Predatory lenders can charge unreasonably high rates of interest and require substantial collateral in the likely event a borrower defaults.2

Predatory lending may also be associated to payday loans, also termed payday advances or small-dollar loans and many other names. Payday loans are short-term, low-cost, unsecured loans, which can appear to carry substantial risk to the lender. To prevent usury, some jurisdictions limit the rate of annual percent (APR) that a payday lender can charge, while others outlaw the practice entirely.

The laws regarding usury are formulated by state laws and differ between states. The amount 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 the kind of loan. Usury laws don’t apply to all loans but only certain ones as deemed as necessary by state law.

The types 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 and personal student loans, payday loans, and other agreements with institutions that are not banks.

Credit cards are characterized by high rates of interest 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

Because usury laws are set individually by states The penalties for violating usury laws vary. The penalties could include the lender having to pay back all interest paid due to the borrower of the time with additional fees in addition. The fees typically amount to greater than what the creditor would have received. Violators may also be subject to prison time.

An example of Usury

John is unemployed and has no health insurance. He gets injured while fixing his roof leading to medical bills costing the client $10,000. John can pay $2,000 from his savings account, but is unable to pay the rest in cash to pay for the medical expenses. John asks his family and friends to lend him money, but none have available cash.

A bit pressed, 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% a month. The state in which John lives has a law on usury which limits an interest charge to 9%. In this instance, the creditor is charging John usury, and in violation of state law.

Is Usury a Crime?

Usury is usually a crime but can be a violation. Federal government as well as each state, has its own usury laws, stating the maximum rate of interest that can be charged on certain kinds of loans. If a creditor charges a rate higher than this, they would be in violation of the law and would be held responsible for a violation of the law on usury.

What is the current Usury Rate?

Each state specifies its own rate for usury and how it is calculated. For instance, the current usury rate in North Dakota is the “maximum rate of interest” that could be charged for loans of money by lenders that are not regulated and is up to 5.5% higher than the current cost of money, as shown by the average rate of interest due to U.S. Treasury Bills maturing within six months; but regardless the maximum permitted interest rate cannot be lower than 7%. “4

When Did Usury Become Illegal?

Usury has a long history. It has primarily become illegal to stop individuals from taking advantage of predatory loan methods; instances where people have to borrow money, but are subject to a high interest rate, often resulting in difficulties in repaying the loan with interest and/or financial ruin. It is also prohibited in some religions, which has resulted in a change in its legality within society.

Do Usury Laws apply to private loans?

Yes, usury laws do apply to private loans. Most loans taken out of an institution of banking are subject to usury laws to protect against unjust lending methods.