What Is a Usury Rate?

The term usury rate refers to a rate of interest that is considered to be excessive as compared to prevailing market interest rates. They are often associated with unsecured consumer loans, particularly those relating to subprime borrowers.

Understanding Usury Rates

Historically, the term usury was used to describe all forms of lending involving the payment of interest by the borrower. In recent times, however, the term is generally used to describe only those loans which carry particularly high rates of interest. These high rates have therefore come to be known as usury rates.

In the United States, the Federal Deposit Insurance Corporation (FDIC) associates usury rates with predatory lending, which it describes as the practice of "imposing unfair or abusive loan terms on borrowers." Predatory lenders will generally target demographic groups with less access to or understanding of more affordable forms of financing.

Usury Laws by State

Usury laws and high interest rates are directly related to state laws on the matter. Each state can set its own requirements. For example:

Washington: A lender may charge interest greater than 12% per year if the interest rate has been agreed to in writing.

North Dakota: The usury rate is equal to 5.5% higher than the current cost of money based on the interest rate on U.S. Treasury Bills maturing within six months. The maximum allowable interest rate ceiling may not be less than 7%.

Missouri: The usury rate is the greater of the market rate or 10%, with the interest rate on second mortgages deregulated.

Each state can have its own process for setting the rate. Examples of the baselines states can use to set usury rates include:

• Setting rates based on short-term (6-month) U.S. Treasury Bill rates
• Setting rates based on long-term (52-week) U.S. Treasury Bill rates
• Setting rates based on the U.S. prime rate
• Setting fixed rates
• Setting rates based on written agreed rates

Usury Rate Applications

Most usury interest rates apply to consumer loans, and usury laws dictate what financial institutions can and cannot charge clients. Because usury laws are primarily dictated by states, usury rates often do not apply to credit card debt, retail installment contracts, or consumer leases.

One of the more obvious disconnects regarding usury rates are credit cards. Consider the options offered by Bank of America as of July 2022. After the introductory APR offer ends, clients will be charged interest at a variable APR rate will fluctuate between 15.49% and 25.49%.

Usury interest rates do not apply to credit card companies as courts have held that national banking associations can charge cardholders according to the law of the state in which it is chartered, not necessarily where the customer resides.

In addition, not every state has usury laws that restrict business contracts performed within the state.

Assessing Usury Rates

The line between a usurious interest rate and a merely high interest rate can be difficult to assess with quantified boundaries set by state. For instance, payday lenders—who provide high-interest loans to subprime borrowers—are often accused of being predatory lenders.

Their defenders, however, argue that their high-interest rates are justified by the fact that the loans they provide carry unusually high risk. Without permitting high-interest rates as compensation for this risk, those who rely on payday loans may find themselves without any financing options at all.

Several organizations such as TreasuryDirect and The Wall Street Journal provide real-time or periodic updates on interest rates in markets such as personal lines of credit (LOCs), auto loans, student loans, home mortgages, and many others. By reviewing these sources, consumers can better understand whether the rates offered by a particular lender are reasonable.

Using these means, consumers seeking credit often have resources available to determine whether rates are excessively high. Similar to any free market where consumers can choose to buy any good at any price, loans can be priced differently. It may sometimes be up to the customer seeking a loan to determine what price they are willing to pay.

Example of Usury Rate

James is a first-time homebuyer looking for mortgage financing. Although James currently has a well-paying job, he had faced issues with personal debt in the past and as such has a very low credit rating. Due to his poor credit history, the mainstream banks are unwilling to extend him a mortgage. Therefore, James is forced to look for alternative means of financing his home purchase.

One of the options available to him is a private lender named Diane, who offers to lend him 80% of the purchase price of the home over a 25-year amortization period, with an interest rate of 40% per year. Diane argues that although the 40% interest rate is considerably higher than that offered by the banks, it is not unreasonable due to the fact that James's credit score indicates he is a high-risk borrower.

After doing more research into the prevalent interest rates in various markets, James rejects Diane's proposal. He argues that although he is considered a subprime borrower, the 40% interest rate is unreasonably high and an example of predatory lending.