Usury Rate Defined

What Is a Usury Rate?

The term usury rate refers to a rate of interest that is considered to be excessive as compared to prevailing market interest rates. They are often associated with unsecured consumer loans, particularly those relating to subprime borrowers.

Understanding Usury Rates

Historically, the term usury was used to describe all forms of lending involving the payment of interest by the borrower. In recent times, however, the term is generally used to describe only those loans which carry particularly high rates of interest. These high rates have therefore come to be known as usury rates.

In the United States, the Federal Deposit Insurance Corporation (FDIC) associates usury rates with predatory lending, which it describes as the practice of "imposing unfair or abusive loan terms on borrowers." Predatory lenders will generally target demographic groups with less access to or understanding of more affordable forms of financing. 

The line between a usurious interest rate and a merely high interest rate is the subject of some controversy. For instance, payday lenders — who provide high-interest loans to subprime borrowers — are often accused of being predatory lenders. Their defenders, however, argue that their high interest rates are justified by the fact that the loans they provide carry unusually high risk. Without permitting high interest rates as compensation for this risk, those who rely on payday loans may find themselves without any financing options at all.

To help consumers decide for themselves whether a particular interest rate is reasonable, several sources exist that publish current interest rates in various markets. For instance, organizations such as TreasuryDirect and The Wall Street Journal provide real-time or periodic updates on interest rates in markets such as personal lines of credit (LOCs), auto loans, student loans, home mortgages, and many others. By reviewing these sources, consumers can better understand whether the rates offered by a particular lender are reasonable.

Religious Responses to Usury

The practice of lending for interest has existed for thousands of years. Over the centuries, Christianity, Judaism, and Islam have all condemned predatory lending and have pursued various strategies to regulate the practice.

Real World Example of a Usury Rate

James is a first-time homebuyer looking for mortgage financing. Although James currently has a well-paying job, he had faced issues with personal debt in the past and as such has a very low credit rating. Due to his poor credit history, the mainstream banks are unwilling to extend him a mortgage. Therefore, James is forced to look for alternative means of financing his home purchase.

One of the options available to him is a private lender named Diane, who offers to lend him 80% of the purchase price of the home over a 25-year amortization period, with an interest rate of 40% per year. Diane argues that although the 40% interest rate is considerably higher than that offered by the banks, it is not unreasonable due to the fact that James's credit score indicates he is a high-risk borrower.

After doing more research into the prevalent interest rates in various markets, James rejects Diane's proposal. He argues that although he is considered a subprime borrower, the 40% interest rate is unreasonably high and an example of predatory lending.