Usury is the charging of interest above the maximum rate permitted by law. In everyday conversation, people sometimes use the word for any loan with an extremely high rate. Legally, however, a high rate is not automatically usurious. The real question is whether the interest and charges exceed the ceiling that applies to that lender and transaction.
In the United States, there is no single nationwide usury limit for every loan. States set many interest-rate rules, while federal banking law can change which state’s limit applies. Different rules may also govern credit cards, payday loans, mortgages, business loans and certain protected borrowers.
What Is the Legal Definition of Usury?
In modern American law, usury generally means charging, taking or contracting for interest above the maximum rate allowed by applicable law. The exact test differs by state. Courts may look at whether there was a loan or extension of credit, what counts as interest, which ceiling applies and whether the lender exceeded it.
Interest can include more than the stated percentage rate. Under federal rules for national banks, certain late fees, annual fees, cash-advance fees and similar charges can count as interest. State law may define those charges differently for its own usury rules.
A Short History of Usury Laws
Usury rules are much older than modern banking. Ancient legal and religious traditions often restricted lending at interest, and at some points the word ‘usury’ referred to charging interest at all. Over time, the concept shifted toward excessive or unlawful interest.
Usury laws also formed part of early American law. Colonial governments commonly imposed maximum rates and sometimes severe penalties. During the nineteenth century, many states relaxed some restrictions as commerce expanded, although interest-rate regulation never disappeared from U.S. law.
How Do Modern Usury Laws Work?
State usury laws vary widely. A state may set a general maximum rate and then create different limits or exemptions for particular lenders and loans. The cap can depend on the loan amount, whether the borrower is a consumer or business, whether the debt is secured and whether the lender holds a special license.
That is why there is often no single ‘legal interest rate’ for an entire state. A general cap may apply to a private loan while another statute allows a licensed lender to charge more. Some commercial transactions and corporate borrowers may also receive fewer protections.
Why Credit Cards May Follow Another State’s Rate
Federal banking law is one of the biggest complications. Under 12 U.S.C. Section 85, a national bank can generally charge rates permitted by the law of the state where the bank is located. In Marquette National Bank v. First of Omaha Service Corp. (1978), the U.S. Supreme Court held that a national bank could apply its home state’s permitted rate to out-of-state credit-card customers even when the customer’s state had a lower ceiling.
This is often called interest-rate ‘exportation.’ Federal law gives similar authority to certain state-chartered insured banks. As a result, a borrower’s home-state usury limit does not necessarily control a credit card or bank loan from an out-of-state institution.
Are There Federal Interest-Rate Caps?
There is no generally applicable federal cap for every consumer loan, but federal law imposes limits in particular situations. One important example is the Military Lending Act. For most covered consumer credit extended to eligible active-duty service members and their covered dependents, the Military Annual Percentage Rate, or MAPR, may not exceed 36 percent. The MAPR can include certain fees and add-on products as well as ordinary interest.
Is APR the Same as the Usury Rate?
Not always. Annual percentage rate, or APR, is mainly a standardized disclosure measure showing the cost of credit. A usury statute may use a different definition of interest and may count or exclude fees differently. A loan’s APR therefore should not automatically be treated as its legal usury rate.
What Happens If a Loan Is Usurious?
Penalties depend on the law that applies. State remedies may include loss of some or all interest, repayment of excess interest, statutory damages or limits on collection. The principal is not automatically erased in every case.
For national banks, 12 U.S.C. Section 86 provides specific remedies. Knowingly charging more interest than Section 85 allows can result in forfeiture of the entire interest. If unlawful interest has already been paid, a borrower may be able to recover twice the amount of interest paid, subject to the statute’s requirements and time limit.
The Bottom Line
Usury means unlawful interest, not simply expensive credit. Modern U.S. usury law is a mixture of state rate ceilings, lender-specific exceptions, federal banking rules and special federal protections. Whether a loan is usurious can depend on the lender’s charter, the type of loan, how fees are classified and which state’s law governs.
A rate that looks unusually high may still be lawful, while a lower rate can violate the law in another transaction. The correct question is always: what maximum rate applies to this specific lender and this specific loan?