Usury law is the law governing interest rates, specifically the maximum rate of charge allowed by law. These laws are for any money borrowed privately, and are applied on a state to state basis. The federal government, while it has the authority to do so, currently does not mandate a federal usury law, but let’s the states decide this interest amount individually.
The government did however in 1980 due to high inflation, allow national banks to ignore state usury laws. Under usury law, anyone charging over their state’s interest limit for monies loaned would be in violation of the statute and subject to penalty and civil suit action.
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Two Kinds of Usury Law Limits
Usury is a complicated area of law. When looking at your state’s usury law limit, you must take into consideration what type of loan you are dealing with.
Usury law limits are divided into two (2) categories with separate interest ceilings:
General: The general limit affects transactions between a person or business lending to another person or business. To lend above this rate, such as a payday loan store does, you need a special permit from the state.
Legal: In certain states there are special exceptions where there is a legally binding contract for certain loans that state interest to be charged at the highest legal rate. These loans are not typical however, and sometimes are referred to as “judgment” rates. An actual judgment rate differs however, in that the interest rate is determined by the end of the contract. This is usually only applied in certain investments.
State by State
Usury law limits vary greatly from one state to another. Some states simply do not have a usury limit. Although it is true in these states interest can be significantly higher than in other states, there is a ceiling. The federal government while not regulating rates has established certain “loan-sharking” statutes to prosecute and stop predatory lending practices. Take a moment and learn your state's rate.
For example, in Alabama the general limit is a mere 8% while just north in Kentucky the limit is tied the federal interest rate and the limit can be as high as 19% by law.
Why Are You Paying More?
Most people are a little shocked when they see the law and ask why they are paying more than the legal limit in their state. Many credit card companies and even banks are exempt from usury restrictions and free to charge higher interest rates. These lending institutions have applied and received special permission from the state to be in the lending industry and are not betrothed to usury law.
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Who Set’s the Limit and Why?
Each state governing body sets the limits for usury in their state. For a change to be made in the amount or application of usury there must be a bill presented and be voted on. Many companies have a large financial stake in what these usury laws dictate, for a simple reason. These usury laws limit how much money they can make when lending money. In an effort to have usury laws more “business friendly” many companies now lobby heavily in their state’s capitals to affect higher usury law limits. The largest and most aggressive lobbyists are employed by the payday lenders. These payday lenders loan money to people in financial distress at very high interest rates, and they make a lot of money. While usually viewed as predatory lenders, these payday lenders stay right at the edge of the law, constantly pushing the envelope to maximize profits. A single digit percent increase allowance in a given state’s usury law could mean potential millions in increased loan profits for a large payday lender. It is no wonder they spend so much money in an effort to influence state usury law.