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Usury Laws: Definition, Purpose, Regulation and Enforcement

By Will Kenton

Updated on July 18, 2022

Reviewed by Thomas Brock

The truth is verified through Hans Daniel Jasperson

How Are Usury Laws?

Usury laws govern the amount of interest that may be paid on the loan. Usury laws specifically target practices that charge excessively high interest rates on loans by setting caps on the maximum amount of interest that could be charged. These laws are designed to protect the consumer.

Within the United States, individual states are accountable for establishing their individual usury laws.1 Although this kind of financial activity could be a violation of the Constitution’s commerce clause, Congress has not traditionally concentrated on usury. The government does consider the collection of money through violent means to be a federal offense.2

Key Takeaways

Usury laws set the amount of interest is charged on a variety of loans including credit cards, personal loans or payday loans.

The laws governing the securities market are mostly enforced and enforced by states, not on the federal level.

Because usury laws are determined by the states, laws differ based the state you reside in; as a result, interest rates may be drastically higher in one state than the next.

Some banks charge the maximum rate permitted in the state where they are incorporated, as opposed to the state in which you reside. This is a practice that was legalized after a 1978 U.S. Supreme Court ruling.

How Usury Laws Are Circumvented

Credit card companies generally benefit from being able to charge charges for interest that have been permitted by the state in which the company was incorporated instead of adhering to the laws governing usury in the states where the borrowers live. Nationally chartered banks can also utilize the highest interest rate allowed by the state in which the company was founded. When they incorporate into states such as Delaware or South Dakota, such lenders have historically enjoyed greater leeway allowed by those states’ usury laws that are more flexible.

Delaware, in particular, is frequently chosen to be the place of incorporation of many financial institutions due to the flexibility granted in the payment in interest charges. Around half of the credit activity in the U.S. market is conducted by corporations that have been incorporated in Delaware, though they may have their headquarters operating in other states.

Special Takes into Account

There is some debate on the validity of the usury laws based on decisions of the U.S. Supreme Court and legislation gave financial institutions the capacity to circumvent the limits. 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 the companies could charge in states where they were incorporated.3

Delaware’s adoption of the Financial Center Development Act, which substantially eliminated restrictions in the state on interest and fees that could be charged on loans to consumers and further boosted the desire of financial institutions to establish a branch there.4 Banks only had to set up subsidiaries or fulfill certain conditions for incorporation within the state in order to take advantage of the law and avoid usury laws in other states. As a result of this activity, some other states modified their laws on usury to give local-based financial institutions the right in charging interest at a par with out-of-state lenders.

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