What it means
In everyday speech usury means charging an unreasonable interest rate, but in law it has a specific meaning. A rate counts as usurious only if it exceeds the legal maximum that applies to that type of loan, in that place, and for that type of lender.
The limits vary widely. Some jurisdictions set a flat cap, some tie the cap to a market benchmark, and others have no cap for certain loans, such as large business loans.
Banks that are regulated at national level can often lend across state lines at rates allowed in their home state, which makes the practical picture complicated. Consequences also vary.
A lender who charges a usurious rate may lose the right to collect the excess interest, may have to refund it, may forfeit all interest, or may face fines, and in serious cases the whole loan can be unenforceable. For businesses, usury matters in two situations.
One is when the company is the lender, for example in trade credit terms or loans to employees, where hidden fees may push the effective rate over the limit. The other is when the company borrows from non-bank lenders, where a rate that seems high may be unlawful and negotiable.
The question of what counts as interest is central. Origination fees, late charges and other costs can be treated as interest for the cap in some places, so the effective annual rate, which includes all charges, can be what matters.
Lenders usually manage the risk by testing every product against the strictest cap that could apply before launch. Borrowers who suspect a loan is above the limit should get legal advice early, because the remedies and the time limits for claiming them vary from place to place.
In practice
Real-world examples
Example 1
A founder borrows $30,000 from a private lender who adds a $3,000 arrangement fee to a stated 15% interest rate. Under local law the fee counts as interest for the cap. The effective rate rises above the legal maximum, and the borrower's lawyer raises a usury defence.
Example 2
A bank offers a credit card to customers in a state with a low interest cap, but the bank is based in a state with no cap. Because of the way the banking rules work, the bank charges its home-state rate on the card. The practical effect is that the customer's state cap does not apply.
Example 3
A company lends $5,000 to an employee at 30% a year to cover an emergency. The finance team discovers that the maximum rate for private loans is much lower. It reduces the rate and refunds the excess to avoid legal trouble.
Think of it
Charging usury is like selling a bottle of water in the desert for five hundred pounds. You are taking unfair advantage of someone who has no other options.
Formula
Calculation
Excess interest = Interest charged - Interest at the legal maximum rate
A small business borrows $10,000 for one year at 24% simple interest from a private lender. The legal maximum in that jurisdiction for this type of loan is 18%. Interest charged = 10,000 x 24% = $2,400. Interest at the legal maximum = 10,000 x 18% = $1,800. Excess interest = 2,400 - 1,800 = $600. Depending on the local law, the borrower may be able to recover the $600, or the lender may lose the right to all $2,400 of interest.Case study
Seen in the real world
Redwood Bridge Finance is an illustrative, fictional short-term lender that offered business loans to small shops. Its standard loan was $8,000 for six months, with a monthly rate of 2.5% and a $400 processing fee.
A borrower's lawyer pointed out that the legal ceiling for that type of loan was 24% a year, and that the fee counted as interest. Interest over six months was 8,000 x 2.5% x 6 = $1,200, and adding the $400 fee made total charges of $1,600, which is an annualised cost of (1,600 / 8,000) x 2 = 40%.
In the illustrative outcome, the lender had to repay the excess over the ceiling and redesign its products. The compliance officer also introduced a rule that every new product be tested against the cap using the all-in cost.
Watch out
Common mistakes
- Calling any high interest rate usury, when legally it must exceed the applicable maximum for that loan type and place.
- Looking only at the stated interest rate and ignoring fees that the law may treat as interest.
- Assuming the same cap applies everywhere, when limits differ by country, state, lender type and loan size.
Questions
People also ask
Is usury a crime?
It can be, depending on the jurisdiction and the circumstances, but more often the penalty is a civil one such as loss of interest or a refund.
Do usury laws apply to business loans?
Often less strictly than to consumer loans, and some places exempt large commercial loans entirely, so the rule should be checked locally.
Is a high rate always unlawful?
No, a rate is unlawful only if it breaks the legal limit that applies, so a high rate can be legal where no cap exists.