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Is this usury in action or a helpful source of credit to those with limited options?

Is this usury in action or is it a helpful source of credit to those with limited options in a financial pinch?

What is usury? What are usury laws and usury rates? Can credit cards be usury? Where is the line between simply making money by charging interest and being usurious? Should there even be a line? What does the Bible say about usury and interest? Is there a technical definition of usury? Let’s take a look at all of these questions and more in this comprehensive guide to usury and interest and then please weigh in with your thoughts in the comments below.

Usury Definition

The definition of usury has changed over time. In the past, the meaning of usury was interchangeable with the meaning of interest. Any type of interest charged was the exact same as usury (i.e. fees had to be paid to “use” money). However, this usury definition has morphed over the years to now arrive at the modern day definition of usury which is essentially that usury is an excessive or unlawful rate of interest.

State Usury Laws

In the United States usury is regulated at the state level. State usury laws vary from state to state with regulations sometimes differing wildly from one state to another. For example, in Alabama the general usury rate is only 8% while in Colorado it is a whopping 45%! (Source)

Usury law is also quite complex with many different exceptions and issues with entity classification. For example, in the state of Texas many payday loan lenders skirt the Texas usury laws by registering themselves as Credit Service Organizations (CSO’s) that are then not regulated by the Texas Office of Consumer Credit Commission (OCCC).

Are you subject to your state’s usury laws even if you just want to lend someone a couple hundred bucks? Yes. This is not legal advice of course as you should seek out guidance from a qualified usury law attorney with experience in cases dealing with usury law in your state but it is my understanding that even small person to person loans are subject to state usury laws (whether they would actually be enforced is another matter altogether).

Credit Card Usury?

79-percent-interest-credit-card

(Photo Credit: Bob Hansen, NBC San Diego)

When it comes to credit cards and usury laws or other bank products and state usury laws you should be very aware of one very important caveat to the state usury laws: banks, credit unions, credit card companies, and savings & loan institutions are all exempt from adhering to state usury laws in the state that they offer their products in as they must adhere to only the usury laws of the state that they are domiciled in (1978 Supreme Court decision Marquette National Bank v. First of Omaha Service Corp.).

What this means is that if your credit card issuer is headquartered in Delaware and you are a resident of California then the California usury laws will not apply to credit card products marketed by your Delaware domiciled credit card company even though they are being offered to you as a California resident.

This is why many credit card companies will quite naturally seek out home states with very liberal usury laws so that they can “export” those higher interest rates into states with much more restrictive usury laws. Which in turn brings us financial products like the First Premier credit card with the startling 79.99% interest rate!

This means that it is all the more important to shop around and compare credit cards to find the card that is best for you:

Should there be Usury Laws?

Should usury laws even exist? Here are some of the things that you will hear from both usury law critics and usury law champions.

Arguments AGAINST Usury Laws

Critics of usury laws point out that high interest rates compensate for the high risk inherent in lending money to those with bad credit who have a good chance of defaulting on their debts and never paying back a dime.

Critics also point out that no one is forcing people with bad credit to apply for a high interest rate loan and people can decide of their own free volition where they would like to apply for a loan if at all.

Critics of the usury laws believe that there is technically no such thing as an unjust rate of interest absent some form of collusion because in a perfectly free and unfettered market then competition will drive down interest rates to the lowest point that the given credit risk will be able to bear (i.e. if Amscot charges 90% interest on a payday loan then Cash America could charge only 80% interest to garner more market share and Billy Bob’s Payday Loans may end up only charging 70% interest and steal even more market share from Amscot which in theory would force Amscot to lower its interest rates or offer some other type of incentive to get more customers if it wanted to be able to compete with Cash America and Billy Bob which would in turn force Billy Bob and Cash America to lower its rates or do other things to get those same customers business, etc. etc. ad nauseum).

Arguments FOR Usury Laws

Those in favor of usury laws say that consumers need proper safeguards against excessive rates of interest because high interest rates and fees creates a debt cycle that is very difficult for those who are a part of to get free from.

Those in defense of usury laws believe that the principles of personal freedom and personal responsibility can still be maintained while having usury laws because enacting legislation to protect consumers from high rates of interest is similar to already existing laws that protect consumers from any other number of things like drunk driving, lead paint, etc.

Those defending usury laws also point out that in many neighborhoods it is difficult for the free markets to perfectly function because there may only be one or two local lenders and there is not enough robust competition to drive down interest rates to the market equilibrium.

The Bible and Usury

Most people already know that the religion of Islam prohibits any type of interest but what is not as well known is that the Bible also has some guidelines that deal with interest and usury. Some of the relevant Biblical verses that deal with usury and interest include:

“If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.” - Exodus 22:25 (KJV)

“Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.”Leviticus 25:36,37 (KJV)

“Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.”Deuteronomy 23:19,20 (KJV)

While the above verses are all Old Testament Bible verses the New Testament parable of the nobleman who entrusts some of his money to his servants while he is away (referring to Jesus entrusting Christians with all of the things that God has given them and admonishing Christians to act as wise stewards of all that God has given them) offers some helpful insight regarding usury and interest:

“Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’”Luke 19:23 (KJV)

“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury”Matthew 25:27 (KJV)

Many Christians believe that the Bible teaches to give freely to those in need without asking for anything in return while also being good stewards with their money and practicing smart business practices of which interest and lending is certainly a part.

Questions for YOU

Do you believe that usury laws are a good thing?

What is your definition of usury (i.e. where do you draw the line between “fair” interest and “unfair” interest?)

What do you believe the Biblical/Christian approach to usury and interest should be?

NOTE: As always, be a smart and informed consumer by shopping and comparing the interest rates and other features of any credit cards you are considering before submitting an application.

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9 Responses to “Usury & Interest Guide: Usury Definition, Usury Rates, and is Your Credit Card Usurious?”

  1. Len Penzo says:

    I’m in the anti-usury law camp. My opinions are based on the premise that nobody is automatically entitled to a loan – if you can’t afford the terms of the loan, or cannot understand the terms or their long-term impacts, then buyer beware.

    I definitely think usury laws inhibit a collector’s ability to be justly compensated for lending money to high-risk individuals.

    I also believe usury laws ironically make it more difficult for higher credit risk borrowers to get a loan.

    In my opinion, in the free market, people looking for loans should be able to comparison shop for the best loan rates.

    An informed and fiscally savvy public will allow competition to keep rates reasonable. The lender of an unsecured loan also has an interest in keeping rates at a point that will not cause the borrower to default. Charging obscene interest is not a really good idea in that regard.

    I’m sure I my opinions will stir up a bit of a hornet’s nest.

    Best,

    Len
    Len Penzo dot Com

    • Joel says:

      I can see how your comments might be inflammatory to some but I actually agree with pretty much everything you said.

      I think that I could pretty much say with confidence that I am opposed to usury laws BUT I am all for consumer protection laws that force lenders to fully disclose all of the rates and fees associated with their loans.

      It’s perfectly fine IMO for lenders to charge whatever rate of interest they want to charge because as you mention there is (and shouldn’t ever be) some kind of guaranteed access to a low interest loan for anyone and everyone.

      That being said, I am very much in favor of laws that protect borrowers by forcing all lenders to be 100% up front and honest about the terms of their loans and not hiding behind incomprehensible fine print that is difficult to understand at best and downright trickery at worst.

      One thing that does give me pause about saying that I am fully two feet inside of the anti usury laws camp is that in order for the free market to work properly then there must be a lot of competition and in some small neighborhoods in certain areas of the country there may not be adequate enough competition to force down rates as in a highly populated city with a lot of competition.

      Granted, the Internet with its price shopping and competition amongst online payday loan lenders has alleviated some of this concern but that is just one concern that I have. Do you think that this is a legitimate concern of mine or am I just being a traitor to my capitalistic roots? :) Thanks for the comment Len!

  2. Len Penzo says:

    I too have no problems with mandatory, clearly written in layman’s terms, truth-in-lending disclosures, Joel. In fact, I think those should be mandated by the government (I’m not one of those “no regulation at any cost guys”). For the system to work properly truth in lending disclosures are required simply because there are many people out there that are incapable of “running the numbers” for themselves.

    Unfortunately, it is a given that those laws aren’t fool-proof because most people fail to read their truth in lending statements anyway.

    Regarding your last point about some areas with a lack of competition – I think that is rare, but a valid concern just the same.

    I saw something that said 76% of all US households had a computer with Web access in 2008.

    Of the remaining 24%, I would conservatively venture at least half of them live in high population areas where there should be plenty of competition. So we are left with roughly 12% – and I still think that is over-stating the problem. I mean, I’ll bet they have a phone with a phone book. There is no reason they can’t make a few phone calls, right? In this day and age, money can be transferred to accounts electronically – no need to have to get a loan from a local bank, right?

    Even so, the fact that some areas might exist with minimal or no competition offers an opportunity for other lower-priced lenders to swoop in and take advantage of that.

    • Joel says:

      I agree that in most cases the onus for finding the lowest cost option is really on the consumer to shop around and compare different companies either by phone, Internet, or in person. This is as it should be and the only real problem areas are people in maybe small communities who are just not as savvy with price shopping as maybe they should be and so they just go with what they know which may be the only payday loan/cash advance/title loan/etc. place in town.

  3. Excellent, informative and timely post Joel!

    Do people actually sign up for credit cards without checking what the fees and interest rates are?

    I would think we let free market reign. S/he who wishes to pay 79.9% APR, so be it. Why should we stop them? Maybe they get a kick out of flirting with danger, without ever paying it since they are always on time!

    Sam

    • Joel says:

      That’s a good point because with my American Express TrueEarnings Card that I use for the cash back I could care less what the APR is because I never carry a balance. However, most high APR cards also come with minimum rewards and high fees as well. Very true though!

  4. Ron says:

    This is a tough one. I think usury today is a matter of making poor choices on the part of the consumers and a matter of greed/risk on the part of issuers.

    Personally, I think you should give if you’re able and lend to the bank otherwise, and I think usury laws are a good idea. How much interest is usury? Probably somewhere just north of 25% for me personally, depending on the risk of loss.

    Great, thought provoking post.

    • Joel says:

      It is a tough one because there are some great points on both sides.

      I think that the #1 deciding factor for me is that access to credit is not a right but a privilege and no one is forcing anyone to take out a loan so as long as the lender is acting in a forthright and honest fashion then it should be a matter of borrower beware.

      If a lender wants to charge 3,000% interest then that is fine with me as a potential borrower because I will just say thanks but no thanks and move on to somewhere else (or not take out a loan at all).

      That being said, I am however very much opposed to lenders that do not clearly spell out the terms of their loans.

  5. s'hatz says:

    Those who practice usury (lending with interest) are subject to the same punishment as any sin without redemption…death. Remember, the only time that Yeshua actually resorted to physical intervention was over the money lenders in the temple court. The New Testament story that supposedly gives a green light to allowing some reasonable interest is portrayed in the parable of the rich man and talents. The rich man was shown to be a hard taskmaster, he would reap where he did not sow, he would gather where he did not seed. This is of course what the world esteems as a sophisticated business individual. Woe to be a banker when the LORD returns.

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