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What is Usury?

Usury involves lending money at an interest rate considered excessively high or beyond what is permitted by law. Originating in England during the 16th century, usury initially referred to charging any interest on loans. This regulation aimed to establish clear lending norms within society. Over time, the definition evolved to signify charging exorbitant interest rates, although certain religions and regions still deem charging any interest as unlawful (Islamic for instance).

In 16th-century England, limits were imposed on interest rates to regulate personal and small group lending, a stark contrast to today’s extensive banking systems.

Usury Laws and Predatory Lending

Usury laws protect consumers and businesses from predatory lending, defined by the FDIC as imposing unfair loan terms on borrowers. Predatory lenders often exploit less informed or financially vulnerable groups, demanding unreasonable interest rates and hefty collateral, anticipating borrower default.

Particularly, payday loans, offering small, short-term unsecured loans, can carry significant risks for lenders. To counteract usury, some regions cap the annual percentage rate (APR) these lenders can charge, while others ban payday loans altogether.

Penalties for usury also vary by state, potentially including full interest repayment by the lender to the borrower, additional fines, or even imprisonment.

While typically a crime, usury can also be a lesser violation. Both federal and state usury laws stipulate maximum chargeable interest rates on specific loan types. Charging beyond these rates is illegal.

Example of Usury

For instance, consider John, who, after incurring $10,000 in medical expenses, borrows $8,000 from an acquaintance at an 18% monthly interest rate, double his state’s legal limit of 9%. This lender is committing usury and breaking state law.

Usury rates differ by state. For example, North Dakota’s usury rate is 5.5% above the six-month U.S. Treasury Bills rate, with a 7% minimum.

Private Loans and Usury Laws

Private loans are subject to usury laws to prevent exploitative lending practices. Most non-banking institution loans fall under these regulations, ensuring fairness in private lending. How

Merchant Cash Advances and Usury

While MCAs offer quick access to funds, they are not categorized as loans. Instead, they are considered “commercial transactions”. This distinction is crucial because it means that MCAs are not subject to the same usury laws that govern traditional loans. The cost of an MCA is typically represented using a factor rate rather than an interest rate, which can often result in higher repayment amounts compared to traditional loan products.

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