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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

What Is Usury?

Usury is the act of loaning money at a rate that is considered unreasonably excessive or is greater than the rate permitted by law. Usury first became common in England under King Henry VIII and originally pertained to the charge of any interest on loaned funds. Over time it evolved to refer to charging excessive interest however in certain religions and areas of the world charging any interest is considered illegal.1

Important Takeaways

Usury is the act of lending money at an interest rate that is deemed to be unreasonable excessive or is greater than the maximum rate allowed by law.

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

Judaism, Christianity, and Islam particularly take a strongly stance against the use of money.

Today, usury laws help safeguard investors from predatory lenders.

States are able to set their own rules for usury, and as a result, each state has different usury interest rate caps.

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Understanding Usury

The practice of charging interest in loans is not new, but in 16th-century England the law imposed restrictions in place regarding the interest can be legally charged on the loan. However, throughout history certain religions have stayed away from usury altogether as charging interest went against their fundamental beliefs.

Because the first lending was made between individuals and small groups unlike the banking system of in the present, setting strict social norms for lending terms was considered to be vital.

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

Specifically, Judaism, Christianity, and Islam (the three Abrahamic religions) adopt a firm stand against usury. Several passages in the Old Testament condemn the practice of usury, especially when lending money to individuals without access to more secure sources of funding. Within the Jewish community, this was the reason for the principle of lending money at interest only to those who were not a part of the community.

The Old Testament’s condemnation of usury led to the Christian tradition against money lending. Certain Christians believe that the people who lend money should not have any expectation of remuneration. The Protestant Reformation in the 16th century created a distinction between usury (charging high interest prices) and the more acceptable lending of money at low-interest rates. Islam, on the other hand historically, has not distinguished between the two, however it is not permitted to charge interest in the religion.

The Usury Law and the Predatory Lending

Today, laws governing usury help to protect consumers from lenders who are predatory.

Predatory lending is defined by the FDIC in the sense of «imposing unfair and excessive loan terms on customers.» The majority of predatory lending is targeted at groups that have less access to or knowledge of the more conventional methods of financing. The lenders who are predatory can charge astronomically high rates of interest and require substantial collateral in the event that the borrower defaults.2

Predatory lending can also be associated with payday loans, also termed payday advances or small-dollar loans, among other names. Payday loans are small-sum, short-term non-secure loans which could appear to be a significant risk for the lender. To prevent usury, some jurisdictions restrict the rate of annual percent (APR) that payday lenders are allowed to charge, while others outlaw the practice altogether.

Usury laws are determined by the state and vary between states. The amount permitted by the state’s usury laws is determined by the size of the loan as well as the kind of person or entity that is making the loan and also the type of loan. Usury laws do not apply to all loans but only certain ones as deemed by the state.

The types of loans that are subject to the usury law include ones where there is no written contract from a non-bank institute, loans with a written agreement from a non-bank institute or loans for private students, loans, payday loans, and all other kinds of agreements with banks that do not have a bank.

Credit cards are characterized by 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 individual by states the penalties for breaking the laws on usury can be different. The penalties could include the lender having to return all interest on the loan to the borrower of the time with additional fees added on. The fees are usually more than the interest the creditor could have earned. Violators may also be liable to jail time.

An example of Usury

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

Hard-pressed, John borrows money from the friend of a person who he doesn’t really know. The creditor loans him the amount of $8,000 and charges him an interest rate of 18% per month. The state in which John lives has a law on usury which limits the interest rate to 9 percent. In this instance the creditor is charging John usury and in violation of state law.

Is Usury a crime?

Usury is usually considered a crime, but it could be a violation. Federal government and each state, has their own usury laws, stating the maximum rate of interest that can be charged for specific types of loans. If a creditor is charged rates higher than this, they will be in violation of the law and held responsible for a violation of the law on usury.

What Is the Current Usury Rate?

Each state specifies its own usury rate and how it is calculated. For instance, the present usury rate is in North Dakota is the «maximum rate of interest» that could be charged on loans of money made by non-regulated lenders , and is equivalent to 5.5 percent higher than the current cost of money as reflected by the average interest rate due to U.S. Treasury Bills maturing within six months; but regardless, the maximum allowable interest rate ceiling may not exceed 7%.. «4

What was the date that Usury When Did Usury Become Illegal?

The history of Usury is long. It is primarily illegal to prevent people from engaging in predatory loan practices; situations where people have to borrow money, but are being charged high interest rates, often resulting in having difficulty repaying the loan with interest and/or financial ruin. Usury is also not permitted in all religious traditions, which has had an impact on the legality of borrowing in our society.

Do Usury Laws Apply to Private loans?

Yes, usury laws do have an effect on private loans. Most loans made outside of the banking institution are subject to laws governing usury to protect against unfair lending practices.

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