Avoiding A Usurious Loan

Tilly Tanga

Tilly Tanga

Published on: 27 April, 2021

Updated: 10 March, 2023

Law Scrabble

Learn how to navigate Usury Laws in the US

This article was written purely for educational purposes, the information depicted in this piece does not constitute legal, or financial advice. Consult your lawyer, tax, or financial advisor before making any decisions based on the information you’ve read in this post. The tips outlined below are applicable to the United States, Internal Revenue Service.

Maybe you are like most people and tend to leave complicated legal matters to the experts. We tend to think of ourselves as ‘experts’ in our own right, but if you are one of the few you have seriously looked into the laws surrounding loans with friends and family members, you might have stumbled upon the scary topic of usury laws. It is a big topic, especially in the United States, and it is often followed by fear-inducing sentences threatening fines, sanctions, or even jail time. However, we have found that once you get a good grasp on what usury laws are, and what they mean, it is really easy to navigate these regulations! Knowing this, we have put together this short guide walking you through what usury laws mean for you.

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First off, what are Usury Laws?

Usury, pronounced (yoo’zhe-ree) is, as defined by Dictionary.com, as:

  • The practice of lending money and charging the borrower interest, especially at an exorbitant or illegally high rate.
  • An excessive or illegally high rate of interest charged on borrowed money.
  • Archaic. Interest charged or paid on a loan.

Straight from the source; check out the Usury definition at Dictionary.com.

When a lender charges an unreasonable or illegal rate of interest, it’s called usury. Broadly speaking, usury laws are in place to stop lenders from charging a ridiculously high interest rate to their borrowers and exist to enforce fair lending practices. In fact, regulations similar to modern-day usury laws have existed for thousands of years, and across many cultures. (Plato, Hammurabi, and even Queen Elizabeth held their own views on usury laws!).

The most common application of restrictions around usury has been in enforcing a legal limit to what a lender is allowed to charge a borrower in interest on a debt instrument, such as a promissory note. Cultures around the word enact these kinds of restrictions to prevent predatory lending. Without these laws financial institutions could charge people in need something like 83.74% interest on a loan, and we’ve all been in need once or twice in our lives, so we should be thankful these laws are in place.

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How are Usury Laws enforced in the United States?

While there is some federal verbiage about usurious lending, most of the details about complications exist at the state level. Delaware has different laws than California, and Alaskan lending differs from Wyoming.

At the federal level, most often, if you exceed the legal interest rate, your interest is essentially nullified.

Straight from the source: 12 U.S. Code § 86 — Usurious interest; penalty for taking; limitations

However, the limit which is specified in the above U.S. code is defined, interpreted, enforced independently by most states. For example, Massachusetts caps the interest rate at 6%, while in DC you can go up to a 24% interest rate as long as you have your agreement in writing.

So what does this mean for you?

Bottom line, a usurious contract involves any one party charging another party an illegally high-interest rate on borrowed money. So for you, avoiding the accidental creation of a usurious contract means you need to consider the laws of the land and make sure you are doing things by the book.

As individuals, depending on your state of residence, you may be subject to usury laws. California usury law may be different from Florida usury law, and so on and so forth. This means you have to be sure you understand what your interest rate limit is, and what the existing penalties and exceptions are if you pass the interest rate limit. All in all, we know that most people are perfect angels and only charge their friends and family super low interest rates, but for the few opportunistic people out there, make sure you do your homework on usury.

If you are making a loan in the United States, you can easily check your state’s applicable laws and regulations on this website.

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Why can’t I charge a 0% interest rate to avoid usurious loans altogether?

Charging a 0% interest rate would allow you to avoid the complications associated with usury laws. However, you might want to read up on the tax implications for doing so before leaving the borrower free of interest obligations.

Now that you've learned how to pronounce usury, and have essentially grasped the meaning of usury, we hope this short guide helped you gain a firmer understanding of usury laws, and how they might apply to you. Remember that starting a loan with someone can be stressful, so make sure you get all your questions answered before jumping into it!

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About the author

About the Author

Tilly Tanga

Director of Operations

Tilly Tanga is the Director of Operations at Pigeon. Having graduated from Bowdoin College and spent numerous years in the healthcare field helping others, she has combined her unique skill set to help support the broader Pigeon community through education and evangelism. An expert in community engagement, Tilly is the voice of The Carrier, a newsletter series by Pigeon. She writes about all the latest developments, successes, and news happening within the Pigeon community every month.