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Table of Contents

How Is Usury?

Understanding Usury

Regulations on Usury and Prior Lending

An example of Usury

FAQs about Usury

Personal Finance Loans

What Is Usury? Definition, how it works Legality, and an Example

By Julia Kagan

Updated February 07, 2022.

Review by Thomas Brock

How Is Usury?

Usury is the act of lending money at an interest rate that is deemed to be unreasonable high or that is higher than the rate permitted by the law. Usury first became common in England under King Henry VIII and originally pertained to the charge of any interest on loans. As time passed, it grew to mean charging excess interest however in certain religions and regions of the world, charging any 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 law.

It was first popularized in England in the time of Henry VIII, the King of England. Henry VIII.

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

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

States have their own laws regarding usury and as a result every state has its own usury interest rates.

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Understanding Usury

Charging interest in loans is not new, but in 16th-century England, limitations were put on the amount of interest you could charge legally on the loan. But throughout the ages certain religions have abstained from usury altogether as the idea of charging interest was against their core principles.

Because earlier lending was conducted in small groups and between individuals, in contrast with the banking system that is used today, establishing strict guidelines for lending conditions was considered crucial.

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

Specifically, 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, especially when lending to less wealthy individuals without access to more secure means of financing. For instance, in the Jewish community, this was the reason for the rule of lending money at interest only to non-natives.

The Old Testament’s prohibition against usury also led to the Christian tradition of not lending money. A few Christians believe that those who lend should not be expecting anything in return. The Protestant Reformation in the 16th century created a distinction between usury (charging high-interest prices) and the more acceptable loan of money with low interest rates. Islam in contrast has never established this distinction, however the practice of charging interest isn’t allowed in the religion.

The Usury Law and the Predatory Lending

Today, the laws on usury to protect consumers from predatory lenders.

Predatory lending is broadly defined by the FDIC as “imposing unfair and unfair loan conditions on borrowers.” Predatory lending often targets groups that have less access to or understanding of more traditional types of financing. These lenders may charge unreasonable high rates of interest and require substantial collateral in the likely event the borrower defaults.2

Predatory lending is also affiliated in payday loans, also termed payday advances or small-dollar loans and many other names. Payday loans are small-sum, short-term unsecured loans, which can appear to be a significant risk for the lender. To avoid usury, certain states restrict the rate of annual percent (APR) that payday lenders can charge, while others outlaw the practice entirely.

Usury laws are determined by the state and vary between states. The amount allowed by state usury laws is based on the amount of the loan as well as the kind of person or entity who is making the loan and the kind of loan. Usury laws don’t cover all loans but only to certain ones as deemed as necessary by state law.

The kinds of loans that are subject to the usury law include those where there is no written agreement from a non-bank institute, loans with a written agreement from a non-bank institute or personal student loans, payday loans, and other agreements with institutions that are not banks.

Credit cards have very high rates of interest, however credit cards do not fall under the law of usury as defined by a 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 in each state, the penalties for violating the laws on usury can be different. The penalty may include the obligation for the lender to pay back all interest paid on the loan to the borrower most of the time with additional fees that are added to. The fees usually amount to more than the interest the creditor could have earned. Violators may also be liable to jail sentences.

A good example of Usury

John is unemployed and does not have health insurance. He gets injured while fixing his roof, resulting in medical bills costing him $10,000. John can pay $2,000 from his savings but has no money in cash to pay for the medical expenses. John asks friends and family members to borrow funds however, none of them have cash.

Hard-pressed, John borrows money from an acquaintance of a friend whom he does not know well. The lender loans him the amount of $8,000 and is charged the interest at 18% a month. The state in which John lives has a law on usury in place that limits rates of interest to nine%. In this instance the creditor is charging John usury, and is in violation of state law.

Is Usury a Crime?

Usury is typically an offense, but it can be an infraction. Federal government as well as each state, has its specific laws on usury that specify the maximum interest rate that can be charged on certain kinds of loans. If a creditor charges a rate higher than this, they will be breaking the law and held accountable for violation of the usury law.

What is the current Usury Rate?

Each state has the rate of its own 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 funds by lenders that are not regulated and is up to 5.5 percent more than the cost currently charged for money as reflected by the average interest rate due to U.S. Treasury Bills maturing within six months. However, in any event the maximum allowed interest rate cannot be less than 7%. “4

What was the date that Usury Became Illegal?

The history of Usury is long. It is primarily unlawful to protect individuals from predatory loan methods; instances that require people to borrow money but are subject to a high interest rate and often have difficulties in repaying the loan which can result in financial ruin. It is also prohibited in many religious traditions, which has resulted in a change in the legality of borrowing in our society.

Do Usury Laws apply to private Loans?

Yes, the laws on usury do have an effect on private loans. The majority of loans made outside of an institution of banking are subject to usury laws to stop unjust lending methods.


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Related Terms

Usury Rate

The term”usury rate” is a term used to describe a rate of interest that is considered to be high compared to prevailing market interest rates.


What is a Payday Loan? How It Works, How to get One, and legality

The term payday loan is a type of borrowing that’s short-term and where a lender will provide high-interest credit dependent on your income.


What is Riba in Islam And Why is It Prohibited?

Riba is an Arabic word meaning “to raise” or “to surpass,” refers to unequal exchanges or charges for borrowing that are forbidden by Islamic law.


Unlawful Lending

A wrongful loan is a loan that fails to comply with lending regulations like loans with illegally high interest rates or that exceed size limits.


Interest: Definition and Types Charges for the Borrowing of Money

Interest is the monetary charge to borrow money. It’s usually expressed in an annual percentage rate.


Usury Laws: Definition, Purpose, Regulation and Enforcement

The laws governing the use of money determine what interest is allowed on a loan. These laws exist for the sake of protecting the borrowers.


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