Regulation of Loans by Usury Laws

Lending and then charging exorbitant or unethical interest rates is called usury, and it is illegal in most places. Consumer lending laws protect borrowers from excessively high interest rates. From the beginning of civilized society, usury laws have protected consumers; the Greeks were the first to regulate interest rates. The Romans capped interest in 443 BC, and in England in the 11th century, charging any interest at all was a criminal offense.

The English were not the only early people to pass laws on usury. American colonists adopted similar laws, most limiting interest to a cool 8%. During the early part of the twentieth century, deregulation caused most states to repeal usury laws, but starting in the mid 1940s, most again capped interest at an albeit higher 36%. South Dakota eliminated its usury laws in 1978, encouraging most credit card companies to move their businesses there.

Most of us think of credit card companies and banks as lenders, but usury laws apply to other institutions as well. The federal government passed a law in 1980 that allowed national banks to bypass states' usury limits. Specialty lenders such as pawnbrokers, payday loan offices and smaller loan companies are exempt from usury limits. The government has imposed a limit of twice the amount of a national bank's home state's usury limit.

State laws apply to loans between an individual and a corporation or between two individuals. For instance, if you loan money to a neighbor, you can't charge exorbitant interest. The state usury laws also apply to loans made by businesses, and rent-to-own transactions. Most states also regulate the amount that can legally be charged. If you have a contract that stipulates interest without outlining terms, the prevailing legal rate applies.