Depending on where you live, you could get a small loan with an annual percentage rate of 36%, 300% or 600%.
Why the staggering difference? Many factors contribute to the rate you receive on secured and unsecured loans, including your creditworthiness and the type of lender. But the reason one borrower can be quoted a rate 10 or 20 times higher than another may come down to their states’ usury laws.
What is a usury law?
A usury law prevents lenders from providing extraordinarily expensive — or usurious — loans to consumers. Essentially, usury laws are interest rate laws.
There is no federal law that sets maximum interest rates on all consumer loans; rather, rates are restricted at the state level. This means usury laws vary between states.
Most states have been restricting interest rates for the majority of their existences, says Lauren Saunders, associate director at the National Consumer Law Center (NCLC).
“Usury law” can refer to the first interest rate laws made in the 19th century, when young states set rate limits around 6%, or it can refer to modern versions of those laws, like the 36% consumer loan rate cap Illinois passed in 2021, Saunders says.
Those first laws are more like a net that catches everything that doesn’t fall under another, more recent law, says Creola Johnson, Presidents Club Professor at The Ohio State University Moritz College of Law.
Today, a patchwork of usury laws made to accommodate banks, payday lenders and various types of loans govern interest rates in each state.
Usury laws for banks and online lenders
Banks can often charge up to the maximum interest rate allowed by the state where they are based. Over time, however, most states also exempted banks from their usury laws to entice them to set up shop there, Johnson says.
That means most banks don’t have to abide by most states’ lending laws.
These rules also allow high-cost online installment lenders, which consumer advocates call rent-a-bank lenders, to provide loans with triple-digit APRs in states with more restrictive rate laws, Johnson says.
For example, a financial technology company that operates nationwide can partner with a bank in a state with lax interest rate rules and provide loans to consumers across the country according to that state’s law.
Some online personal loan lenders partner with the same banks as high-interest lenders in order to offer loans nationwide, but they cap rates at 36%. In other words, the model isn’t unique to high-interest installment lenders.
Usury laws for payday lenders
Payday lenders are often exempt from state usury laws and instead governed by other laws, often called deferred deposit transaction laws, Saunders says.
Payday loans are often a few hundred dollars. Many states set different rate caps on small loans based on the loans’ size and repayment term. The specifics often differ between states.
What’s your state’s maximum interest rate?
Your state may have more than one law governing loans, especially small loans.
For example, many states have different rate limits for $500 loans with six-month repayment terms and $2,000 loans with two-year repayment terms.
This chart shows state interest rate caps for those two types of loans.
The exception: the Military Lending Act
The Military Lending Act is a federal law that trumps state rules. It requires that loans made to active duty military members or their dependents be capped at 36% APR.
“The Military Lending Act is basically a federal usury law, but it only protects active duty soldiers and their dependents,” Johnson says.
Consumer advocacy groups, including the NCLC and the Center for Responsible Lending (CRL), argue that the 36% rate cap should be rolled out to all consumers, which would essentially eradicate payday and other high-cost lending nationwide.
As of June 2023, 20 states and Washington, D.C., have passed legislation that caps payday loan APRs at or near 36%, according to the CRL.
What to do if you have a high-interest loan
In a 2022 study from the CRL, 85% of borrowers said making payments on a high-cost installment loan caused an experience that negatively impacted their finances.
Here are some options if you have a high-interest loan.
Ask the lender for help. Some lenders offer hardship programs for borrowers who are struggling to repay their loans. These plans may include paused or reduced monthly payments. However, a lender may try to keep struggling borrowers in debt by offering to let them refinance a loan, which lowers the monthly payment but results in higher interest costs and longer-term debt. Look instead for a program that reduces your payments without adding much time to your loan term.
Check if the lender is licensed in your state. National banks don’t need a state license, but most other lenders do, Saunders says. You probably don’t have to repay a loan from an unlicensed lender, she says, but consult an attorney before stopping payment. In this case, you can also complain to your state’s attorney general and the Consumer Financial Protection Bureau (CFPB).
Seek help. If you’re struggling to repay a high-interest loan, turn to local charities or nonprofits, a family member or a credit counseling agency. Though it may be difficult to ask for help, it may be your best option.
Know your rights. Payday lenders are known to aggressively pursue borrowers to collect their money, but some methods are out of bounds according to the Fair Debt Collection Practices Act. For example, Johnson says payday lenders sometimes threaten to have you arrested for not repaying the loan, which they can’t do without a court order. They also can’t garnish your wages without a court order, according to the CFPB.