Legal Definitions - usury law

A usury law is a legal regulation designed to protect borrowers by setting a maximum allowable interest rate that lenders can charge on loans. Its purpose is to prevent predatory lending practices where individuals or entities might exploit those in need of funds by imposing excessively high costs for borrowing money.

Here are some examples illustrating how usury laws apply:

• Personal Loan Scenario: Imagine a state where the usury law caps personal loan interest rates at 25% APR (Annual Percentage Rate). A private lender offers a struggling individual a $2,000 loan, but the repayment terms require the borrower to pay back $3,500 within six months. This repayment structure translates to an APR of over 150%, far exceeding the legal limit.

  How it illustrates usury law: In this situation, the usury law would render the interest charged above 25% illegal and unenforceable. The borrower could potentially challenge the loan terms in court, and the lender might be forced to reduce the interest to the legal maximum or even forfeit all interest, depending on the specific state's usury penalties.

• Small Business Financing: A small startup company, desperate for working capital, approaches an alternative financing provider. The provider offers a short-term business loan with an effective annual interest rate of 80%. However, the state's commercial usury law sets a maximum interest rate of 36% for business loans of that size and type.

  How it illustrates usury law: The usury law would protect the small business by making the portion of the 80% interest rate that exceeds 36% illegal. This prevents the financing provider from legally collecting the exorbitant charges, safeguarding the business from being financially crippled by excessive borrowing costs.

• Car Title Loan: A person needs quick cash and takes out a car title loan for $1,000, using their car as collateral. The lender requires them to repay $1,300 in just one month. This equates to an APR of 360%. If the state's usury law specifically limits interest rates for car title loans to 100% APR, then the lender is in violation.

  How it illustrates usury law: The usury law prevents lenders from charging such extreme rates on essential loans. It would deem the interest above the 100% cap illegal, potentially allowing the borrower to recover the excess interest paid or even voiding the entire interest portion of the loan agreement, depending on the severity of the violation and state statutes.