The practice of lending money and charging interest has been around for centuries. When the interest charged to the borrower is exorbitant, it is no longer a simple loan but considered usury. This is lending money and charging an excessive interest rate to the borrower or charging an illegal rate.
Both literature and ancient laws share a negative view of usury. In Dante’s Inferno those who practice it are placed on the lowest ledge in the seventh circle of hell. In medieval Roman law, usury was punishable by a fine of four times the amount charged while robbery was punishable by only twice the amount taken.
The state or national governing body, depending on the country, sets usury laws. What is included in the law is as important as what is excluded from the law. In general, these laws govern loan transactions between individuals or organizations whose primary function is not to loan money. For example, usury laws would cap the interest rate charged on a $500 US Dollar (USD) loan between neighbors. Such laws do not cover national banks, pawnbrokers, and other licensed entities.
Each state in the United States sets a usury cap. At the federal level, there is a criminal limit as well. An amount that is more than twice a state’s legal usury limit can incur federal criminal charges. Many state caps are set around 12%. The law is complicated and legal advice is advisable before entering into a loan agreement with a private individual.
It is important to note several exceptions to the usury cap. A loan secured by a piece of real estate is usually not subject to the cap. Small loan companies and installment-plan sellers have special charters that make them subject to different rules. Car financing companies and pawnbrokers fall under this exception.
Banks are able to set individual rates on credit cards and other lending instruments. State laws may limit local banks, but any bank that is national is not subject to the state limit. The national banks, or ones that have “N.A.” in their title, fall under federal laws.
In general, any organization or individual that lends or borrows money will fall under some sort of regulation. If they require a license to operate then the type of license would determine the appropriate regulation. If no license is required then they most likely a usury cap applies to their dealing.
The colorful history surrounding money lending, charging interest, and conflict around monetary transactions raises a flag of caution even today. People should carefully examine financial transactions, and read the fine print. Money spent on legal advice before signing on the dotted line could be a fraction of the interest cost incurred in a poorly chosen loan.
