Besides BOOORRRING - What Are Usury Laws?

The Basics

Usury laws are regulations that set the maximum interest rates lenders can charge on loans. Think of them as the speed limits on the lending highway, designed to prevent lenders from charging sky-high interest rates that could financially harm borrowers 1. These laws aim to ensure fair and reasonable lending practices 2.

State-Level Regulation

Usury laws are typically set at the state level, which means the rules can vary significantly depending on where you are. For example, in Illinois, the maximum interest rate on a written contract is 9% per year, while in the District of Columbia, it's 24% per year3. This variability can make things a bit confusing, but it also allows states to tailor their laws to local conditions 4, 5.

Federal Influence

While there's no federally mandated maximum interest rate for most loans, some federal laws provide protections. For instance, the Military Lending Act caps interest rates at 36% for loans made to active-duty military members and their dependents 4. Additionally, the CARD Act offers protections and transparency for credit card rates 6.

Why Should You Care?

Protecting Borrowers

Usury laws are designed to protect borrowers from predatory lending practices, which involve imposing unfair and abusive loan terms 7. These laws help ensure that people aren't charged exorbitant interest rates that could lead to financial ruin 8.

Penalties for Violations

Violating usury laws can lead to severe penalties, including criminal charges and civil penalties. In some states, lenders who charge usurious interest rates could even face felony charges 9. So, it's crucial for lenders to stay informed about the usury laws in their state 1.

Practical Advice for Private Lenders

Know Your State's Laws

First and foremost, make sure you understand the usury laws in your state. Each state has its own set of rules, and what might be legal in one state could be illegal in another 10. For example, in Florida, the legal interest rate for loans up to $500,000 is 18% per year, and for loans exceeding that amount, it's 25% 11.

Use Written Agreements

Having a written agreement can sometimes allow you to charge higher interest rates. In some states, the absence of a written contract means you have to stick to lower interest rate caps 12. So, always get it in writing! I have an entire system an templates for private lenders to build their documentation stack of paperwork to protect themselves and build a case against a defaulting borrower, if need be. Check out the Informed Investor Program if this is something you could benefit by!

Build Usury Savings Clauses

Consider including usury savings clauses in your loan agreements. These clauses can help reclassify interest payments as principal if the interest rates exceed state standards, or they allow excess payments to be refunded to the borrower 13.

Act Promptly on Violations

If you discover that you've charged usurious interest, act quickly to correct it. Prompt action can help mitigate some of the penalties associated with usury violations 14.

Offer Alternatives

If a borrower is struggling with high-interest debt, consider offering alternatives like balance transfers to a lower interest rate card or directing them to debt counseling services 4. This can help alleviate their financial burden and build goodwill.

Some Data to Consider

Interest Rate Caps

• Illinois: 9% per year on written contracts 3.
• District of Columbia: 24% per year on written contracts 3.
• Florida: 18% per year for loans up to $500,000; 25% for loans exceeding that amount 11.

Exemptions

• Washington: Usury laws don't apply to various types of credit, including commercial and business loans, credit cards, and certain payday loans 15.
• California: Generally restricts simple interest on any loan to 10% per year, but has numerous exemptions 16.

Penalties

• Severe Penalties: Violating usury laws can lead to criminal charges, civil penalties, and even felony charges in some states 9.
• Corrective Actions: Lenders can avoid some penalties by promptly correcting any usurious charges 14.

Conclusion

Usury laws might seem like a dry topic, but they play a vital role in protecting borrowers and ensuring fair lending practices. For private lenders, understanding these laws is crucial to avoid severe penalties and to foster trust with borrowers. Always stay informed, use written agreements, and consider including usury savings clauses in your contracts. And remember, offering alternatives and acting promptly on violations can go a long way in maintaining a good lending practice. Stay savvy, and happy lending!

Get an attorney to verify data. I recommend Geraci LLP. If you’re getting your Godess’ Truth from a helpful blog you need to seek numerous forms of professional services ;)