The practice of lending money and charging an exorbitant or illegally high interest rate is called usury. Consumer-loan usury laws protect consumers from excessive interest rates on loans.
Laws Throughout History
Many different societies throughout history implemented usury laws to protect consumers, according to James M. Ackerman in "Interest Rates and the Law: A History of Usury." Both Plato and Aristotle touted usury as immoral and unjust. The ancient Greeks were the first society to regulate interest rates in 800 to 600 B.C. The Romans capped interest rates at 8 1/3 per cent in 443 B.C., raising the limit to 12 per cent in 88 B.C. In 11th century England, the practice of charging any interest at all was punishable by taking the usurer's land and property. During the 1570s to early 1700s, England implemented several acts to limit interest rate usury.
Early American colonies adapted usury laws, often limiting interest to 8 per cent. During the early 1900s deregulation in America caused the majority of states to eliminate usury laws. During the mid-1940s to late 1970s, all of the states adopted usury laws capping interest at a general usury rate of 36 per cent. However, usury lending laws were eliminated in South Dakota in 1978. Credit card companies moved their businesses to South Dakota as the US Supreme Court decides that national banks may use their home state interest rate laws on a national basis. In 2006, Congress passes the Talent Amendment, capping interest rates on loans made to military personnel at 36 per cent.
Regulation of Commercial Lenders
Many people think of banks and credit card companies as being lenders. However usury laws apply to more than banks. Federal laws were passed in 1980 that allows national banks to ignore state usury limits. According to the 'Lectric Law Library, many speciality organisations, such as instalment plan sellers, pawn brokers and small loan companies, are exempt from state usury laws as well. However, national banks and other state-exempt institutions are held to a Federal limit for interest rates. The federal government has in place a criminal limit of twice the amount of the bank's home-state usury limit.
Regulation of Private Lenders
State usury laws apply to loans made between individuals or corporations. For example, if you loan your neighbour money, you are limited in the amount of interest you can charge by state usury laws. These laws also apply to loans made from businesses to consumers and the sale of property for repurchase.
Many states also regulate the legal rate that can be charged. For example, if you have a contract that provides for interest without specifically stated terms, the legal rate applies. Many states also allow for a legal judgment rate. In the event of a court judgment, the state-set judgment rate is applied to scheduled payments.