Usury laws: What they are and why you should care

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In a Nutshell

Usury laws aim to keep lenders in check by setting standards around the interest rates they can charge you. But these standards don’t necessarily apply to all credit types. And because usury laws are primarily regulated by individual states, they can vary depending on where you live.
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Sometimes it may seem as if your monthly loan payments hardly make a dent if your loan balance and interest rate are high and much of your payment goes toward paying the interest.

But depending on different factors, like the type of loan you have and what state you live in, usury laws may come into play when it comes to how much interest you’re charged.

Usury laws are regulations that set limits on the amount of interest rates, and fees in some states, that lenders can charge. These laws are mostly regulated by individual states, which means they can be drastically different depending on where you live. And, complicating things a little more, certain banks can charge you the interest rate allowed under state law where they’re located rather than the maximum rate in your state — even if it’s higher — thanks to a U.S. Supreme Court decision.

Usury laws are complicated. Still, it’s important to understand what usury laws are and when they might apply to you.

What are usury laws?

Usury laws have a long and interesting history. They’re some of the oldest laws around, found in references from more than 4,000 years ago — about the same time the first alphabet was invented.

Since then, usury laws have been well documented in legal texts and even religious books. Today, these laws are primarily regulated and enforced at the state level, though federal law can also apply.

Some states will set an interest-rate cap on loans and detail what conditions must be in place for usury rules to apply, including which lenders usury laws apply to. For example, interest-rate caps that apply to payday lenders may differ from those applying to other lenders. And rates can vary. In Illinois, parties to written contracts may agree to an interest rate of no more than 9% per year. But in the District of Columbia, the maximum interest rate on a loan with a written agreement is 24% a year. Just keep in mind that these rates can change if the laws change, and fees, along with rates, can be regulated depending on state law.

The bottom line around state usury laws is that they are many and varied. In the state of Washington, for example, there are various types of credit that usury laws don’t apply to, like …

  • Agricultural, investment, commercial and business loans
  • Credit cards
  • Eligible home equity loans
  • Certain payday loans
  • Certain mobile home loans
  • Past-due property taxes

Because there are exceptions to the type of credit that’s regulated by an individual state’s usury laws, and federal law can also apply, it can be challenging to determine if the interest you’re being charged on your debt would be considered usurious under the law. Your best bet to find out may be to check your state government’s website. For example, Texas residents can visit the Texas Office of Consumer Credit Commissioner online to find out the current Texas interest rate maximums.

What is the maximum interest rate allowed by law?

Though the federal government has its say, the U.S. doesn’t set a single maximum interest rate, because usury laws vary so much state by state. Instead, the interest rate you may get for a loan — if you’re approved — depends on the loan product you’re qualified for and where the lender is headquartered.

Some states may have additional rules that govern the interest-rate cap on loans, depending on whether there is a written contract. 

Which state’s usury laws apply to my loan?

The contract you signed should specify which state’s laws apply — the state where you live, or the state where the lender is based. If you live in Florida, for example, but take out a loan from a lender in New York, chances are your contract is governed by New York state laws, not the laws where you live. Check your contract to be sure.

How can I tell if the interest rate on my loan is illegal?

If you suspect your loan interest rate might violate usury laws, the first step is to check what your state’s usury laws are, confirm which state laws govern your loan (yours or the lender’s), and then seek legal advice before you proceed. State usury laws can be very confusing, especially since many states have written exemptions into the law and federal law can also apply.

Additionally, ensure that you understand what annual percentage rate, or APR, you’re charged. Did an introductory rate expire or are you being hit with a penalty APR? If you’re subject to a penalty APR, review any missed payments since that can lead your lender to raise your interest rate.

If your lender is charging you interest rates above the usury limits, you may have legal recourse — even if you’ve already made payments on your loan. Check your state’s laws to find out about any recourse you may have, but your best may be to talk to an attorney.

Bottom line

Although it might seem like loan regulations favor the lender, there are multiple laws in place to protect you, including usury laws.

But usury laws can be confusing, especially since states have varying exceptions and federal law can also come into play. And while not a part of usury regulations, federal laws like the Fair Debt Collection Practices Act, the Truth in Lending Act and the Military Lending Act may also provide you with protections around unfair lending practices.

About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee. She writes for websites such a… Read more.