Usury

Usury refers to the practice of making a loan at an interest rate that is deemed unreasonably high or higher than the rate ceiling set by the law. Unreasonably high-interest rate makes it an unethical financial loan that unfairly benefits the lender and disfavors the borrower.

Usurers are those who engage in usury. However, loan sharks are a more popular term and a usury synonym in modern times. Charging high-interest rates is common for lenders engaged in unsecured loans like credit card loans and personal loans.

• Usury refers to the high rate of interest decided by the lenders, which is beyond the permissible limit per law and regulations.
• Usury laws help in protecting borrowers against the unethical or illegal rates established by the lenders. 
• Interest rates are a widely used and accepted concept. It is the rate that lenders charge clients who apply for loans. The rate set by the creditor enters the usury category when it is disproportionately high.

Usury happens when the interest rate charged by a lender to a borrower is higher than the lawful limit. For example, banks and online lending companies usually charge the interest rate on loans following regulatory measures set by the country's central bank. But in certain cases, the lender might start charging the loan interest rate beyond the permissible limit. Hence, usury laws help borrowers from predatory lending practiced by the lenders. 

Financial services firms profit handsomely from interest. Points, cash back percentages, interest-free periods, and special offers are just a few techniques to get customers to use their cards. As a result of people being drawn to various conveniences of cards, the high-interest rates on credit cards and consumer revolving credit loans are becoming more widespread. Since lenders lose out on more revenue when customers routinely pay off their debt, they focus on generating more transactions. The real money is made on individuals with lesser incomes since they are simpler to capture.

The government plays a major role in identifying effective usurious interest rates, specifically for revolving credit cards and taking actions to stop the practice to save people from its worst impact. For example, to prevent risk, the government can establish restrictions that would result in the consumer only being required to pay back the principal if the interest on revolving credit is deemed "usurious." Additionally, the customer can ask the lender to reimburse any sum paid more than that.

For instance, The Spanish Supreme Court in November 2015 ruled that interest rates for revolving credit cards double the "normal interest rate," the benchmark reference outlined in the Law of Repression of Usury, are usurious. Additionally, it has ordered that the "normal interest rate" be established following the information on consumer loans released by the Bank of Spain.

Lending was initially practiced between individuals or small groups of people. As banking systems emerged, countries began to create their own rules and regulations and started governing the amount of interest appropriate to charge the borrowers. When King Henry VIII ruled England in 1545, Parliament approved a law allowing interest rates of up to 10%, and anything above would come under usury.

Particularly, the three Abrahamic religions—Judaism, Christianity, and Islam—take a strong position against unethical interest charges. In the bible, usury is mentioned as a practice contrary to morals. Several verses in the Old Testament criticize usury, especially when it's used to give loans to poor people who lack access to safer forms of credit. In Judaism, Jews are generally prohibited from charging interest when interacting with other Jews. In Islam, usury is illegal and also known as Riba.

Usury Laws

The state determines usury laws. In other words, each state in the United States is responsible for enacting its usury laws. The rate permitted by such laws varies according to the loan quantity, the type of individual, the entity making the loan, and the type of loan. The rules do not apply to all loans but only to those determined by the state.

Generally, loans subject to such laws include those with no written agreement from a non-bank financial company, those with a signed agreement from a non-banking financial company, higher education student loans, payday loans, and any other sort of contract with a non-bank financial institution.

Let us look at an example to understand the concept better:

Suppose John wants a $500,000 loan to buy a car, but his bank denies his loan application because of his poor credit score, so he goes to another lender, Jacob. John agrees to obtain the loan at the interest rate set by Jacob, which is 50% of the principal amount. The interest rate is above the legal limit, depending on state law or the permissible limit set by regulatory authorities. The additional rate of interest is the usury rate of interest.

• Interest rate is a broad and common concept. It is the interest rate charged by lenders for providing loans to customers. Usury is also an interest rate variant. Unfortunately, the rate is unreasonably high, making it an illegal interest rate charged by lenders.
• The highest interest rate a lender can legally charge depends on the state rules because each state has its interest rate depending on the lending rules and regulations. Hence interest rates in line with the regulations are legal and ethical. At the same time, usury is an illegal and unethical practice.

This article has been a guide to Usury and its definition. We explain its history, example, laws, and comparison with the interest rate. You can learn more from the following articles -

• Finance Charge
• Guaranteed Loan
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