What Is Usury?

Usury is lending money to a person and charging significantly high interest on a loan in an amount that is more than allowed by law. Over the years, most countries have enacted usury laws to protect borrowers from abusive lending practices.

Let's learn more about what usury is, how it works, and how it can affect consumer finances. We will also delve into usury laws.

Definition and examples of usury

Usury is the act of lending money and charging an excessive amount of interest on a loan that is more than what is allowed by law. Excessive interest is defined as anything that exceeds a legal maximum, which varies by state. Generally, it is a fixed interest rate, not a rate based on compound interest.

Many states have enacted usury laws to protect consumers from abusive credit practices.

Charging excessive interest can cause significant financial damage to borrowers who most need access to a loan.

For example, if a borrower needs to obtain a personal loan but the bank rejects the request, they may have to settle for a lender who will charge the interest rate they want. This can be 40% or more if such a thing is allowed. But that would likely be considered usury, or above the legal interest rate cap, under state law.

Usury laws protect vulnerable borrowers from being exploited by predatory lenders. They can also help prevent people from getting stuck in a cycle of bad credit and debt, which can prevent them from having access to financial products they may need in the future.

How Usury Works

If you take a loan from a bank or online lender, you will be charged an interest rate for the convenience of borrowing the money. However, there are certain rules that your lender must follow to ensure that they are charging interest, not usury.

Interest is a percentage that you pay your lender for a loan, while usury is the act of charging excessive interest rates that are unfair to borrowers. Interest is a fair and regulated practice, but the practice of usury has legal consequences.

History of usury

At first, loans were made between individuals or small groups of people. Over time, as banking systems began to emerge, societies began to create laws around what constituted appropriate amounts of interest.

In 1545, when King Henry VIII ruled England, Parliament passed a statute that allowed interest rates of up to 10%, and anything beyond that was considered usury. In the United States, the colonies continued this tradition, passing its own usury laws. based on the English model. This practice continued even after the colonies gained independence from England.

Usury Laws Today

Currently, most states have usury laws in place and set a limit on the maximum amount of interest that a lender can charge. These fees can vary significantly by state and may differ depending on the type of financial product you are using.

For example, Hawaii sets the maximum interest rate at 10% for loans without a written contract that sets a different rate. State consumer credit transactions carry a maximum interest rate of 12% and credit card companies can charge up to 18%.

Consumer impact

The purpose of usury laws is to protect borrowers from abusive credit practices. Charging excessive interest rates can trap borrowers in a debt cycle that forces them to continue taking on new debt to pay off a previous loan.

Falling into a debt cycle can cause significant long-term financial damage. And according to the Consumer Financial Protection Bureau (CFPB), these types of loans are often marketed to vulnerable borrowers who cannot afford them.

These borrowers are often forced to choose between borrowing more money, defaulting on the loan, or neglecting other financial responsibilities. Proper usury laws can help protect all consumers from this type of abuse.

Predatory loans

Today, usury laws are aimed at protecting borrowers from predatory lenders. Predatory loans use fraudulent, deceptive, and unfair tactics to trick borrowers into obtaining loans that they cannot repay.

These lenders often target people who do not have access to traditional forms of borrowing, often offering loans for wages. Payday loans generally cost around $ 500 or less and mature in two to four weeks from the date of issue.

The loan is usually repaid on the borrower's next payday and often comes with fees that equate to an APR of up to 400%. Different states have different laws regarding payday loans. Some limit the amount of interest and fees that payday lenders can charge, while others prohibit the practice altogether.

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