What is usury?

Predatory lenders look for people desperate to borrow funds — these lenders may take advantage of those in dire financial straits by charging ridiculously high interest rates. However, there are laws in place that limit what a lender can charge. These are called usury laws.

Usury laws provide a measure of protection for borrowers, but they’re only effective if you know your rights. Before you borrow, there are a few things you should know.

Usury defined

Usury is the act of charging an exploitatively high interest rate. These unreasonable rates can make it practically impossible for some borrowers to get out of debt.

What is unreasonable interest, though? This is somewhat subjective, but states typically have their own usury laws that define excessive interest.

Usury laws

Usury laws aim to protect borrowers from predatory lending, which is when a lender imposes unfair loan terms on a borrower. Predatory lenders often offer loans to people with very limited funds or those who aren’t aware of their rights. In some cases, they require collateral to back up the loans, which puts a borrower’s assets at risk.

One often-predatory type of loan is a payday loan. These loans (which some states have outlawed) usually let people borrow money for a two- to four-week period and often come with annual percentage rates (APRs) that are significantly higher than those of a typical personal loan.

Lenders found breaking usury laws may be subject to significant consequences, including being forced to return the money (plus interest) to the borrower, paying fines and fees, and, in some cases, facing jail time. Since these laws are set by each state individually, they vary widely.

Is usury a crime?

Usury can be a crime if a lender’s rate exceeds legal maximums. While there’s no federal law that caps interest rates in the U.S., state usury laws are designed to minimize risk for borrowers who need money but could end up in a cycle of debt they can’t get out of.

There are some federal laws that require transparent disclosures, however, including the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. Under the CARD Act, lenders must provide at least 45 days of notice before a change in interest rates or fees, for example.

Usurious loan rates

Many states have defined usurious loan rates (the highest rate a lender can charge for borrowing money). They differ quite a bit from state to state, but you can find information on your state’s rules online. It’s important to note that your state may also have different rate limits for different scenarios.

It’s a good idea to know if and how your state defines usurious rates.

In New York, for instance, the maximum legal interest rate for loans under $25,000 given to individuals is 16% per year from unlicensed lenders and 25% per year for licensed lenders. Larger loans or loans given to businesses are subject to different limits.

Meanwhile, Florida has a maximum legal rate of 18% per year on loans under $500,000. However, some payday lenders there get around the state’s usury laws by offering what they call deferred presentments. This allows them to provide money in return for a postdated check for the amount borrowed plus a fee.

This fee is capped at 10% of the principal (plus a $5 verification fee), but given the short terms of these loans, the fees borrowers pay can be equivalent to over 500% in annual interest.

Usury laws can be complicated, but they play an important role in keeping you safe from predatory lenders.

Bottom line: How to avoid usury

If you’re considering taking out a personal loan, it’s critical to know your rights as a borrower. By doing a bit of research on the usury laws in your state, you can ensure you’re better prepared to avoid lenders that engage in predatory lending tactics.

To start, research established lenders with a good reputation. It’s also helpful to learn about amortization, how to calculate interest, how much your monthly payment will be and how much you’ll pay overall. Taking these steps can help you to avoid unethical lenders that put you at financial risk.

If you’ve already taken out a loan with a predatory lender, there are debt relief options available. One of our reviewers in Georgia said a “debt consolidation program made it really easy” to get out of credit card debt from their 20s, for instance.