Usury
Usury is the charging of interest on a loan that the law or a religious tradition treats as wrongful. For most of its history it meant any agreed return on a loan of money; today it usually means interest above a legal ceiling.
Also called: usurious interest · usury law · usury ceiling · interest rate cap
The older meaning was absolute. Medieval canon law, following Thomas Aquinas (Summa Theologiae II-II, question 78), held any predetermined charge for lending money to be unjust: money is used up when it is spent, so charging separately for its use was selling something that does not exist. The Hebrew Bible forbids interest between Israelites (Deuteronomy 23:19-20; see ribbit), a rule Jewish law later accommodates through the heter iska, and Islamic law prohibits riba.
The modern meaning is narrower. Protestant reformers, John Calvin among them, accepted moderate interest on commercial loans, and the question moved from whether interest may be charged to how much. England repealed its usury laws in 1854. Merchants had long found routes around the older ban, the medieval bill of exchange being the best known, with the lender's return carried inside an exchange rate rather than stated as interest.
Today usury is mainly a matter of rate ceilings and consumer credit law. In the United States ceilings are set state by state, and the Supreme Court held in Marquette (1978) that a national bank may charge borrowers in other states the rate allowed in its home state. That rule underpins bank-partner lending programmes, and it is why regulators and courts ask who the true lender is when a fintech originates loans through a bank.
In practice
A rate that is lawful under one state's ceiling can be usurious under another's, and the consequences differ by state. Rate rules follow the lender's charter and licence, not the product's marketing.
Example
A non-bank lender licensed in two neighbouring US states offers the same instalment loan at 36 percent a year. In one state that is within the ceiling; in the other it is above it, so the lender must price to the lower limit there or lend through a bank.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Usury, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Riba | Riba is the Islamic prohibition on any predetermined increase on a loan and on certain unequal exchanges, whatever the rate. Modern usury law targets only rates above a legal ceiling. |
See also
- RibaRiba is the prohibited increase at the centre of Islamic finance: an unjustified excess in a loan or in certain exchanges. It is broader than the English word "interest" and is not limited to excessive rates.
- RibbitRibbit is the Jewish-law prohibition on receiving or paying certain forms of interest on a loan between Jewish parties.
- Heter IskaA Heter Iska is a Jewish-law financing agreement that structures an advance wholly or partly as an investment relationship so the provider can receive investment profit rather than prohibited interest on a simple loan.
- Bill of ExchangeA bill of exchange is a written, unconditional order by one party to another to pay a fixed sum of money to a named person or to bearer, on demand or at a set future date. Cheques and trade drafts are bills of exchange.
- Riba al-Nasi'ahRiba al-nasi'ah is riba arising from deferment: any increase stipulated in return for time on a loan, and the deferral of delivery in an exchange of like commodities that must be settled on the spot.