What is usury?
Usury is the term used when someone charges more than the maximum interest rate allowed by law. State laws govern legally allowed interest rates, but usurious lenders try to circumvent the laws in order to charge borrowers — usually those with poor credit — a higher interest rate than is allowed. If authorities discover a usurious lender, the borrower is required to repay only the principal and no interest.
In order for a court to prove that usury is being practiced, there must be a meeting between the lender and the borrower, with the borrower understanding that he or she is paying unlawfully high interest. Normally, it is considered a crime only if the lender is in the business of loaning money at usurious rates.
Laws concerning usury vary by state and sometimes contain exceptions, meaning predatory lenders can get away with actions that are legal in one state and illegal in another. Some states have even repealed usury laws or raised their interest rate caps in a way that harms borrowers.
It is interesting to note that Christianity, Judaism and Islam all take a firm stance against the practice of usury. In spite of calls from religious leaders to end the practice, usurious loans are not uncommon. In fact, by passing loans through a nationally chartered bank and entering into joint lending ventures with Native American tribes, which are exempt from state regulations, predatory lenders have found a new way to charge interest rates of 89 percent to more than 355 percent.
Examples of usury
Payday lenders offer a small loan, normally around $350, and charge a flat fee of $15 for every $100 borrowed (in this case, the fee would be $52.50). If the borrower repays the loan in two weeks, the $52.50 equals an annualized interest rate of nearly 400 percent. The entire amount, including the sum borrowed and the fee, is due at the same time.
To ensure payment, payday lenders require access to borrowers’ bank accounts. Many borrowers are unable to repay the entire loan, so the payday lender rolls that loan balance into a new loan. The fees from the new loan are piled on top of the amount owed on the original loan.
The Community Financial Services Association of America, the trade group for payday lenders, makes loans to more than 19 million American households each year. Its prime target is families who are financially desperate enough to pay nearly 400 percent in interest.