Table of Contents
What Is Usury?
The Usury Laws as well as Predatory Lending
Example of Usury
FAQs on Usury
Personal Finance Loans
What Is Usury? Definition, How It Functions Legality, Example, and Definition
By Julia Kagan
Updated February 07, 2022
Review by Thomas Brock
What Is Usury?
Usury refers to the act of loaning money at a rate that is thought to be unreasonably high or that is higher than the maximum rate allowed by law. Usury was first introduced in England under King Henry VIII and originally pertained to the charge of any interest on loaned funds. In time, it changed to mean charging excess interest however in certain religions and parts of the world, charging interest is considered illegal.1
Usury refers to the act of lending money at an interest rate that is considered unreasonably high or higher than the rates permitted 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, the laws on usury protect investors from predatory lenders.
States have their own rules for usury, and as a result every state has its own usury interest rates.
Loan Shark Definition
The practice of charging interest on loans is not new However, in 16th-century England, limitations were put on the amount of interest you could charge legally on the loan. However, throughout history certain religions have stayed away from usury altogether as charging interest went against the fundamental principles they abide by.
Given that the first lending was made by small groups of individuals, in contrast with the modern banking system used today, establishing strict guidelines for lending conditions was deemed essential.
The high interest rates charged on credit cards are one of the main reasons for the high consumer debt levels within the U.S.
In particular, Judaism, Christianity, and Islam (the three Abrahamic religions) take a very strong stance against usury. Several passages in the Old Testament condemn the practice of usury, particularly when lending to less wealthy individuals without access to more secure means of financing. For instance, in the Jewish community, this led to the principle of lending money at interest only to outsiders.
The Old Testament’s condemnation of usury was also the basis for the Christian tradition of not lending money. Some Christians believe that people who lend shouldn’t be expecting anything in return. The Protestant Reformation in the 16th century brought about a distinction between usury (charging high interest rate) as well as the acceptable loan of money with low interest rates. Islam, in contrast historically, has not distinguished between the two, however the practice of charging interest isn’t allowed within the Islamic faith.
Usury Laws and Predatory Lending
Today, the laws on usury protect investors from lenders who are predatory.
Predatory lending is defined by the FDIC as “imposing unfair and unfair loan terms on the borrowers.” Predatory lending often targets groups that have less access to or understanding of more traditional forms of financing. Predatory lenders can charge unreasonably high interest rates and demand substantial collateral in the event that a borrower defaults.2
Predatory lending can also be associated to payday loans, also termed payday advances or small-dollar loans as well as other terms. Payday loans are small-sum, short-term unsecure loans that can seem to pose a substantial risk to the lender. To stop usury, certain states limit the rate of annual percent (APR) that a payday lender can charge, while some ban the practice completely.
Usury laws are determined by the state and vary from state to state. The amount permissible by state laws on usury is determined by the size of the loan and the type of entity or individual who is making the loan and the kind of loan. The laws on usury don’t have to be applied to all loans but only certain ones as determined as necessary by state law.
The kinds of loans that are subject to laws on usury include ones where there is no written agreement with the bank or other institution, loans with a written agreement from a non-bank institute and personal student loans, payday loans, and any other types of contracts with non-bank institutes.
Credit cards have very high rates of interest, however credit cards don’t fall under the usury law as defined 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 individually by states the penalties for breaking usury laws vary. The penalty may be that the lender must pay back all interest paid to the borrower, often with additional fees added on. The fees are usually more than the interest the creditor would have received. In addition, those who violate the law could be subject to jail sentences.
Example of Usury
John is unemployed and doesn’t have health insurance. He injures himself while fixing his roof resulting in medical bills costing him $10,000. John is able to cover $2,000 from his savings account, but is unable to pay the rest in cash to cover his medical bills. John contacts friends and family members to lend him money, but none have available cash.
A bit pressed, John borrows money from an acquaintance of a friend whom he does not know well. The creditor loans him $8,000 and charges him an interest of 17% a month. The state where John reside has an law on usury in place that limits the interest rate to 9%. In this case, the creditor is charging john usury and is in violation the law of the state.
Is Usury a crime?
Usury is usually a crime but can also be an infraction. Federal government along with each state, has their own laws regarding usury, which specify the maximum interest rate that is allowed on certain types of loans. If a lender charges rates higher than this, they would be in violation of the law and be held responsible for a violation of the usury law.
What is the Current Usury Rate?
Each state has its own rate for usury and how it is calculated. For instance, the present Usury Rate for 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 higher than the cost currently charged for money, as shown by the average interest rate due to U.S. Treasury Bills maturing within six months; but regardless, the maximum allowable interest rate cannot be less than 7%. “4
What was the date that Usury When Did Usury Become Illegal?
It has a long and rich history. It was made illegal to prevent people from engaging in predatory loan practices, situations that require people to borrow money, but are being charged high interest rates and often have difficulty paying back the loan with interest or financial ruin. It is also prohibited in many religious traditions, which has had an impact on the legality of borrowing in our society.
Do Usury Laws apply to private Loans?
Yes, the laws on usury do cover private loans. Most loans made outside of a banking institution are subject to laws governing usury to stop unfair lending practices.
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The term”usury” refers to a rate of interest which is deemed to be high compared to market interest rates.
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Riba, an Arabic word that translates to “to raise” or “to exceed,” refers to unequal exchanges or charges for borrowing, which are forbidden by Islamic law.
A wrongful loan is a loan that fails to comply with lending regulations for example, loans that have illegally high interest rates or those that exceed size limits.
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Interest is the cost for the privilege of borrowing money. It’s usually expressed in an annual percentage rate.
Usury Laws Definition, Purpose, Regulation and Enforcement
Usury laws determine how much interest can be charged on the loan. These laws exist for the sake of protecting borrowers.
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