Table of Contents
How Is Usury?
Usury Laws and Predatory Lending
Example of Usury
FAQs on Usury
Personal Finance Lending
What Is Usury? Definition, How It Functions Legality, and an Example
By Julia Kagan
Updated February 07, 2022.
Review by Thomas Brock
What Is Usury?
Usury is the act of lending money at an interest rate that is thought to be unreasonably high or higher than the rate permitted by the law. Usury was first introduced in England under King Henry VIII and originally pertained to the charging of any interest on funds that were loaned. As time passed, it grew to include charging interest that was excessive however in certain religions and parts of the world charging any interest is thought to be illegal.1
Usury is the act lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by the law.
It was first introduced within England in the time of King Henry VIII.
Judaism, Christianity, and Islam particularly take a strongly stance against the use of money.
Today, laws governing usury help safeguard investors from lenders who are predatory.
States set their own usury laws and, consequently, each state has different usury interest rate caps.
Loan Shark Definition
Charging interest for loans is not a new concept, but in 16th-century England the law imposed restrictions on the amount of interest can be legally charged on the loan. In the past, however certain religions have abstained from usury altogether as the idea of charging interest was against the fundamental principles they abide by.
Given that the first lending was made by small groups of individuals as opposed to the modern banking system used in the present, setting strict social norms for lending terms was deemed crucial.
The high interest rates charged on credit cards are among the primary reasons for excessive levels of consumer debt within the U.S.
In particular, Judaism, Christianity, and Islam (the three Abrahamic religions) have a strong stance against usury. Many passages from the Old Testament condemn the practice of usury, particularly when it comes to lending to individuals without access to more safe ways of financing. Within the Jewish community, this created the rule of lending money at interest only to those who were not a part of the community.
The Old Testament’s prohibition 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. This is because the Protestant Reformation in the 16th century created a distinction between usury (charging high-interest rates) and the more acceptable lending of money at low-interest rates. Islam however, on the other hand historically, has not established this distinction, however it is not permitted to charge interest in Islam.
Usury Laws and Predatory Lending
Today, laws governing usury help to protect consumers from predatory lenders.
Predatory lending is broadly described by FDIC in the sense of “imposing unfair and abusive loan terms on customers.” Predatory lending often targets groups that have less access to or understanding of more traditional methods of financing. These lenders may charge unreasonable high interest rates and demand substantial collateral in the event that the borrower defaults.2
Predatory lending may 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 unsecured loans, which can appear to pose a substantial risk to the lender. To avoid usury, certain jurisdictions limit the rate of annual percent (APR) that payday lenders are allowed to charge, while other states ban the practice altogether.
The laws governing usury are set by state laws and differ from state to state. The rate permitted by the state’s usury laws is determined by the size of the loan, the type of person or entity who is making the loan, and the type of loan. The laws on usury don’t cover all loans however they do apply to specific types as determined as necessary by state law.
The kinds of loans that are subject to the usury law include ones where there is no written agreement with an institution that is not a bank, loans with a written agreement from a non-bank institute or private student loans, payday loans, and any other types of agreements with institutions that are not banks.
Credit cards have very high rates of interest but credit cards are not under usury laws as determined by a U.S. Supreme Court ruling ( Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.) in 1978.3
Penalties for Usury
Because usury laws are set individual by states The penalties for violating usury laws can differ. The penalties can include the obligation for the lender to pay back all interest paid on the loan to the borrower most often with additional fees added on. The fees typically amount to higher than any interest the creditor could have earned. Violators could also be liable to prison time.
A good 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 of his savings, but has no money in cash to pay the medical expenses. John asks his family and friends to lend him money but they do not have cash.
A bit 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 the interest at 18% a month. The state in which John lives has a usury law in place that limits rates of interest to nine percent. In this case 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 also be considered a violation. It is a federal crime, as well as each state, has its own laws regarding usury, which specify the maximum rate of interest that can be charged for certain types of loans. If a creditor is charged a rate higher than this, they would be in violation of the law and be held accountable for violation of the usury law.
What Is the Current Usury Rate?
Every state sets its own usury rate and the method of calculation. For example, the current Usury Rate is in North Dakota is the “maximum rate of interest which may be charged for loans of funds by lenders that are not regulated and is up to 5.5% higher than the cost currently charged for money, as shown by the average interest rate payable on U.S. Treasury Bills maturing within six months. However, in all likelihood the maximum allowed rate of interest cannot be less than 7%. “4
What was the date that Usury Became Illegal?
It has a long and rich history. It was made illegal to stop individuals from predatory loan methods; instances where people have to borrow money but are charged a high interest rate which can lead to difficulty paying back the loan with interest and/or financial ruin. It is also prohibited in some religions, which has had an impact on its legality within society.
Do Usury Laws apply to private Loans?
Yes, usury laws do cover private loans. The majority of loans taken out of a banking institution are subject to laws governing usury to prevent unfair lending practices.
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The term”usury” is the term used to describe an amount of interest that is thought to be too high in comparison to the market rate.
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An payday loan is a type of short-term borrowing where a lender will provide high-interest credit dependent on your earnings.
What Is Riba in Islam, and Why Is It Forbidden?
Riba, an Arabic word that means “to enhance” or “to surpass,” refers to unequal charges or exchanges for borrowing, which are not permitted under Islamic law.
An illegal loan is one that is a loan which isn’t in compliance with lending regulations for example, loans with illegally high interest rates or which exceed the size limit.
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The term “interest” refers to the financial cost for borrowing money. It’s usually expressed in an annual percentage.
Usury Laws Definition, Purpose, Regulation, and Enforcement
Usury laws determine how much interest is allowed on the loan. These laws exist for the sake of protecting the borrowers.
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