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Usury Laws Definition, Purpose, Regulation and Enforcement

By Will Kenton

Updated on July 18, 2022

Reviewed by Thomas Brock

The truth is verified through Hans Daniel Jasperson

How Are Usury Laws?

Usury laws regulate what amount of interest can be paid on the loan. Usury laws specifically target the practice of charging too high interest rates on loans by establishing caps for the amount that can be levied. The laws are intended to safeguard consumers.

In the United States, individual states are accountable for establishing their own usury laws.1 Though this type of financial transaction could be a violation of the commerce clause of the Constitution, Congress has not traditionally concentrated on usury. The federal government has considered the collection of usury through violent means as a federal offense.2

Key Takeaways

The laws governing the use of money set a limit on how much the interest rate can be charged for many types of loans like credit cards, personal loans or payday loans.

Most laws regarding the issuance of bonds are regulated and enforced by the states, and not at the federal level.

Since the laws governing usury are set by the states, the rules differ depending the state you reside in and, as a result, interest rates may be drastically different from one state to the next.

Some banks will charge the maximum rate allowed by the state they are located as opposed to the state where you live–a practice that was made legal in 1978 following a U.S. Supreme Court ruling.

What Usury Laws Are Circumvented

Credit card companies typically benefit from being able to charge interest rates that are allowed by the state in which the business was founded rather than follow the usury laws in force in the states where the borrowers reside. Nationally chartered banks can also utilize the highest interest rate allowed by the state in which the institution was incorporated. By incorporating into states such as Delaware or South Dakota, such lenders have historically benefited from the greater flexibility provided by those states’ relaxed usury laws.

Delaware, in particular, is frequently selected to be the place of incorporation for a number of financial institutions due to the freedom allowed regarding the payment in interest charges. Around half of the credit business in the U.S. market is conducted by firms that are incorporated in Delaware although they could have their headquarters operating in other states.

Special Takes into Account

There is some debate on the effectiveness of usury laws following decisions made by the U.S. Supreme Court and legislation granted banks the ability to get around the limitations. The Supreme Court’s rulings regarding the decision of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers outside of the states at the same rates the companies could charge in the states in which they were incorporated.3

Delaware’s adoption of the Financial Center Development Act, which largely eliminated limits in the state regarding interest and fees that could be charged to consumers who lend and further boosted the desire of financial institutions to establish a branch there.4 Banks simply had to establish subsidiaries or meet certain conditions for incorporation within Delaware to be eligible for the law and thereby circumvent the laws governing usury in other states. In response to this move certain states have changed their usury laws to allow local financial institutions the ability to charge interest rates that are on similar basis to lenders from outside the state.