Most Americans have at least some debt. According to a recent study, U.S. consumers have about $96,000 in debt. While most people carry at least some debt, many may not pay attention to the interest rates they are charged. Lenders and others need to understand the laws regarding loans. State usury laws are in place to ensure that consumers are not overcharged for borrowing money. States have determined the legal amount that consumers may be charged for loans. There are some exceptions to these laws. It is essential for loan companies and others to know when usury laws do not apply.
What is Usury?
When a bank, savings, loan, credit card company, or others provide a loan to a consumer, they charge interest. Interest is the amount of money that is paid to a lender for the use of their money. There is a ceiling on the amount of money a lender may charge for a consumer loan. When a lender charges interest above the legal ceiling, it could be considered usury. Usury is when a lender charges an unlawfully high-interest rate for the money borrowed.
Rate of Interest
The Federal Reserve Bank sets the rate of interest. The interest rate is the percent that a consumer will be charged for interest on a loan. The interest rate a particular consumer charges will be based on their credit history, credit scores, employment, and more. The Federal Reserve Bank of San Francisco provides interest rates and discount rates. A discount rate is the lowest interest rate set for lending to other financial institutions.
Some banks charge the maximum interest rate allowed by law in their state. Interest rate limits can vary from state to state. The laws of the state where the loan provider is incorporated prevail, regardless of where the borrower resides. For example, Delaware is one of the most popular states for businesses to incorporate. Delaware allows for better exemptions from usury laws. As long as a company is incorporated in a state or has an office there, it can utilize the state’s usury exemption laws.
Usury Laws Apply to Various Types of Loans
Usury laws are intended to provide some security to consumers against overcharging for loans. In addition to interest rates, the laws limit the fees and other costs lenders can charge to borrowers. The laws generally apply to all types of loans, such as payday loans, personal loans, and credit cards. Importantly, personal loans made to friends or relatives must comply with usury laws in your state. The usury laws are meant to prevent people from participating in fraudulent loan-sharking activities by charging high rates or fees to borrow money. Usury laws apply to most commercial, agricultural, and business loans.
Who is Exempt from Usury Laws?
Usury laws are made by state governments rather than the federal government. States generally have usury laws in place that put limits on the interest rates that can be charged for loans. Any interest above the rate defined by the State is considered a usurious rate. However, there are some usury law exemptions. While each state sets forth its specific laws, often through its constitution, some exemptions are common.
When you consider who is exempt from usury laws, the most common loan providers are institutions. Institutions that provide consumer loans are typically exempt from usury laws. Institutions include banks, savings and loans, credit unions, licensed pawnbrokers, licensed finance lenders, and personal property brokers. A loan over a certain amount could be exempt from usury laws.
Additionally, a loan made through a licensed real estate broker may be exempt if it is secured by real property. It is important to note that a loan made through a licensed real estate agent is not exempt from usury laws. Usury laws typically do not apply to loans that bear interest. Usury laws generally apply to consumer loans rather than commercial loans. However, there are sometimes exemptions for commercial paper, particularly in the case of small loans. It is best to review the specific usury laws that pertain to your state.
Just because a lender has made a loan in good faith is not a viable defense against usurious lending. If a loan is found to be usurious, the borrower may be entitled to recover the interest they paid over and above the legal limits. The lender may typically be allowed to retain the principle of the loan. The borrower generally has a time limit, which may be two years in some states, to file a claim for usury.
At Snellings Law, LLC, we provide aggressive collection assistance for our clients. We help you turn your receivables into cash. Contact us today at Snellings Law, LLC, to learn more about our legal services.