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Usury Laws: Definition, Purpose, Regulation and Enforcement
By Will Kenton
Updated July 18, 2022
Review by Thomas Brock
Facts checked by Hans Daniel Jasperson
What Are Usury Laws?

Usury laws govern how much interest can be assessed on the loan. These laws target specifically the practice of charging excessively high interest rates on loans by setting caps on the maximum amount of interest that can be levied. These laws are intended to protect consumers.

Within the United States, individual states are in charge of deciding their individual usury laws.1 Although this kind of financial activity could fall under the Constitution's commerce clause, Congress has not traditionally concentrated on usury. The government considers the collection of usury through violent means to be a federal offense.2
Key Takeaways

The laws governing the use of money set limits on the amount of interest can be charged on a variety of loans, such as credit cards or personal loans and payday loans.
The laws governing the securities market are mostly enforced and enforced by the states, and not at an federal level.
Since the laws governing usury are set by the states, the laws vary depending on the location you reside and, as a result, interest rates can be dramatically higher in one state than the next.
Some banks will charge the maximum rate that is allowed in the state in which they are incorporated, as opposed to the state in which you reside, a practice that was made legal after a 1978 U.S. Supreme Court ruling.

In What Ways Usury Laws Are Circumvented

Credit card companies usually enjoy the advantage of being in a position to charge interest rates that are regulated by the state where the company was incorporated instead of adhering to the usury laws that apply in the states where borrowers reside. Nationally chartered banks similarly can use the highest rate of interest permitted by the state in which the institution was established. Through incorporation in states such as Delaware or South Dakota, such lenders have traditionally enjoyed more flexibility granted by these states' relaxed usury laws.

Delaware is a particular state that is frequently chosen as the state of incorporation for a number of financial institutions because of the freedom allowed regarding the payment of interest rates. The majority of domestic credit business in the U.S. market is conducted by companies that incorporated in Delaware, though they may keep their operations in other states.
Special Beacons

There's some debate about the efficacy of usury laws after decisions by the U.S. Supreme Court and legislation gave banks the ability to bypass the restrictions. The high court's decisions in the case in the case of Marquette National Bank v. First of Omaha Corp. permitted credit institutions to charge customers who were out of states at the same rates they were able to charge in the states in which they were incorporated.3

The Delaware's introduction to the Financial Center Development Act, which largely eliminated limits in the state regarding fees and interest that can be charged to consumers who lend and further boosted the desire for financial institutions to relocate there.4 The banks simply needed to set up subsidiaries or fulfill the other requirements for incorporation in Delaware to be eligible for the law and avoid usury laws in other states. In response to this activity some states also modified their laws on usury to grant locally-based financial institutions the right to charge rates of interest that are on par with out-of-state lenders.
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A legally-required amount of interest can be a limit set to prevent lenders from charging their borrowers excessive interest rates.
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Delaware Corporation: Definition, Role of Usury Laws and Benefits
A Delaware company benefits from the privilege of being registered within the state of Delaware however it can also conduct business in any state.
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What Is Usury? Definition, how it works Legality, and an Example
Usury refers to the act of lending money at an interest rate that is considered unreasonably high or higher than the rates permitted by the law.
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