Business Glossary

charging loan interest higher than the rates allowed by law. Interest rates in consumer credit contracts are controlled by state law, and the highest permitted rate is called the usury rate or the usury ceiling. Since the early 1980s, many state legislatures relaxed statutory controls on consumer credit because rather than protecting consumers from unscrupulous lenders, such controls often make it more difficult for consumers to obtain credit. To alleviate this, and to keep banks from moving their credit card operations to states with more liberal statutes, lawmakers revised state statutes to allow interest rates to be set by market competition, rather than specified by laws. Several states have abolished usury ceilings; most states have raised the interest ceilings to encourage more rate competition among financial institutions, and most of these laws have a sunset clause calling for periodic review every three to five years. Some states, including New York, Delaware, and South Dakota have no limits on consumer credit. New York does, however, have a criminal usury ceiling of 25%, a maximum rate of interest that lenders may charge on consumer credit.

State usury laws generally are enforceable only through civil suits filed by debtors claiming excessive interest charges. Most state laws have stiff penalties for illegal interest, ranging from forfeiture of interest owed on the entire loan balance, or forfeiture of both principal and interest. Commercial credit in most states is exempt from usury statutes; agricultural credit is unregulated, though not exempt from state interest rate controls.

charging a rate of interest greater than that permitted by state law. In most states, usury limits vary according to the type of lender and type of loan. Federal laws have been passed to preempt certain usury limits under certain conditions.

Example: The interest rate that must comply with usury limitation is defined differently in the various states. The stated maximum rate may apply to the face interest rate , effective rate to the borrower, or the actual yield to the lender. If a loan is found to be usurious, severe penalties may be imposed, including loss of the principal , interest, a multiple of the interest, and/or damages.

charging a rate of interest greater than that permitted by state law. In most states, usury limits vary according to the type of lender and the type of loan. Federal laws have been passed to preempt certain usury limits under certain conditions.