Usury laws are laws which limit the amount of interest which can be charged on loans. The practice of regulating interest rates is ancient; documents dating back thousands of years discuss usury and its impact on society. The Old Testament of the Bible, for example, mentions usury in multiple places, as do religious texts for numerous other world religions. Usury continues to be a concern in many modern societies.
Put simply, usury involves charging an interest rate which is considered grossly unfair or unreasonable. Loans which jeopardize someone's finances by forcing them to pay large amounts of money to service the loan are considered usury, for example. The interest rate considered “high” depends on the type of loan and the area in which a loan is being made, and religious faith can also play a role in determining unreasonable interest rates. Islamic law, for example, is very strict about interest rates and the practice of charging interest.
Usury laws limit the simple interest rate. They may simply cap interest at a set percentage, as for example eight percent, or they may peg the interest rate to something else. Historically, numerous attempts were made to regulate usury, ranging from outright bans on charging interest to strict usury laws for all loans. However, in the 20th century, many nations deregulated their financial systems and as a result, usury laws were often made less effective.
The United States is an excellent example of a case in which usury laws are largely ineffective, although they do exist. Individual states have usury laws which vary, but national banks and pawnbrokers are exempt from these laws. This means that if a state has a usury law limiting interest at nine percent, someone can still get a loan at a higher rate of interest. Credit card companies regularly sidestep usury laws, offering rates which can climb well over 20%, and so-called “payday loans” often charge similarly high rates of interest.
Consumer advocates concerned about predatory lending practices have argued that the United States needs a national usury law which will limit interest across the board. Stiff resistance to this idea has been encountered from financial companies which stand to gain from the existing system. Some institutions argue that they must charge high rates of interest on high risk loans to balance out the risk, but consumer advocates believe that these high rates often hurt consumers. In fact, a high rate of interest can make a loan more risky by increasing the costs associated with the loan and making it difficult to repay, even for a responsible consumer.
