Usury is the practice of lending money to borrowers at exorbitant interest rates. This predatory lending tactic is against the law, as it forces homebuyers into paying high interest rates on loans.
Because usurious practices affect individuals looking to borrow money for mortgages, it’s a vital part of the real estate exam. Luckily, with our years of experience, we’re here to teach you the crucial details of usury in real estate.
In this post, we’ll define usury, give examples of how it works, and provide a state-by-state guide to how usury laws vary. Keep reading to learn more!
What Is Usury?
Usury is the act of lending money at unreasonably high-interest rates. This illegal practice is an example of predatory lending, as it:
- Makes it difficult for homebuyers to pay off their loans
- Causes high consumer debt levels
- Allows lenders to make money from preying on consumers
Typically, predatory lenders charge high interest rates to borrowers with less access to traditional financing options. This includes borrowers with:
- Low credit scores
- A history of defaulting on debts
- A history of mortgage foreclosure
- Repossession of financed property
Because these borrowers have poor credit, many banks and lending institutions refuse to provide them with home loans. This leaves borrowers with no other option than to seek out private lenders with high interest rates.
How Do Interest Rates Work?
An interest rate is the amount it will cost a borrower to take out a loan. These rates are a percentage of the total loan amount.
Interest rates vary from state to state and can change depending on certain economic factors. However, most homebuyers take out fixed-rate mortgage loans to ensure their rates stay the same over time.
What Is a Maximum Interest Rate?
A maximum interest rate is the highest amount a lender can legally charge for a loan. Private lenders who charge above the maximum interest rate for their state violate usury laws.
Why Do We Have Usury Laws?
Usury laws protect homebuyers from taking out home loans with exorbitant interest rates. States each have their own usury laws that set a maximum interest rate limit for lenders to follow.
These laws prohibit predatory lending practices and ensure that homebuyers pay interest at reasonable rates. State usury laws vary, so real estate professionals need to be familiar with the maximum interest rate for their state.
Which Loans Are Subject to Usury Laws?
All private loans are subject to usury law, including:
- Private student loans
- Payday loans
- Any loans from non-bank institutes
Who Is Exempt from Usury Laws?
State usury laws do not apply to the following:
- Corporations
- National banks
- Credit unions
- Licensed pawnbrokers
- Business loans
- Loans above $5,000 for investment purposes
What Is an Example of Usury in Real Estate?
Sally is a first-time homebuyer with a low credit score. Because of her credit history, she does not qualify for home loans from most banks and mortgage companies.
Because she has limited options, Sally decides to take a loan from a private lender instead. This lender agrees to loan Sally the money but charges an interest rate of 20%. However, the state Sally lives in has a maximum legal interest rate of 6%.
In this case, the lender has violated the law by lending money with rates beyond state usury limits.
Let’s look at a real-world example of a usury violation to better understand how it works.
Attorney General Eric T. Schneiderman vs. Payday Lenders
Payday lenders are the most notorious for lending money at exorbitant interest rates. A payday lender lends money to borrowers on the agreement that the loan will be repaid when the borrower gets their next paycheck.
According to The New York Times, Attorney General Eric T. Schneiderman sued multiple payday companies for violating usury law in 2013. These payday lenders were running their business online and charging New Yorkers interest rates as high as 355%. According to New York usury law, the maximum legal interest rate for documented loans is 16%.
Schneiderman alleged that these lenders were taking advantage of desperate borrowers and violating state usury law. In 2014, Schneiderman and the payday lenders reached a settlement. The predatory companies were ordered to stop charging interest on loans and give refunds to their borrowers.
Who Enforces Usury Laws?
Usury is enforced by state usury laws. Private lenders who charge usurious interest rates are typically punished by state governments.
Penalties for Breaking Usury Laws
The penalties for violating usury laws vary from state to state. In most cases, the lender must return all interest to the creditor and pay additional fines. Violators may also have to spend time in jail in severe cases.
What Are the Criticisms of Usury Laws?
The implementation of usury laws has been a topic of debate since biblical times. Some critics say that imposing maximum interest rates on lenders actually harms borrowers.
They argue that an interest rate ceiling restricts credit flow to inexperienced borrowers seeking first-time mortgage loans. Critics also say that usury laws decrease profitability, which distorts the entire financial market.
Of course, proponents of usury laws would argue that these critics are acting out of self-interest and looking to prey on consumers.
Frequently Asked Questions
Usury laws can be complex, so it’s normal for real estate students to have questions. We’ve compiled a list of frequently asked questions that you should have answered before the real estate exam.
Do Usury Laws Apply to Late Fees?
Borrowers who get charged late fees often claim that usury laws are being violated. However, usury laws only apply to loans. Private lenders cannot be penalized for charging late fees to clients who fail to repay their loans on time.
Are There Federal Usury Laws?
There are no federal usury laws regulating interest rates. Each state determines their own usury laws and maximum rates.
Why Do Interest Rates Fluctuate?
Several factors cause interest rates to fluctuate, including:
- Changes in supply and demand
- Government borrowing
- Inflation
- Central Bank’s policies and objectives
Which Factors Determine a Borrower’s Interest Rate?
Lenders can consider the following factors when determining a borrower’s interest rate:
- Credit history
- Debt-to-income ratio
- Loan-to-value ratio
However, private lenders can never exceed the maximum interest rate for their state regardless of these factors.
A Guide to State Usury Laws
Now that we’ve covered the basics of usury, we must explain how these laws vary from state to state. Check out our helpful guide to determine the state usury laws of each region.
Alabama
Alabama Usury Laws and Maximum Interest Rates
- Alabama Maximum Interest Rate is 6% Annually for undocumented loans
- Alabama Maximum Interest Rate is 8% Annually for documented loans
- Covered in Alabama State Usury Code 1852 Section 8-8-1
Alaska
Alaska Usury Laws and Maximum Interest Rates
- Alaska Maximum Interest Rate is 10.5% Annually for undocumented loans
- Alaska Maximum Interest Rate is Whichever is Greater of 10% or 5% above the Federal reserve rate for documented loans
- Alaska Maximum Interest Rate is Unlimited for documented loans of $25,000 or greater
- Covered in Alaska Statute 45.45.010
Arizona
Arizona Usury Laws and Maximum Interest Rates
- Arizona Maximum Interest Rate is 10% Annually for undocumented loans
- Arizona Maximum Interest Rate is Unlimited for documented loans
- Covered in Arizona Statute 4-1201
Arkansas
Arkansas Usury Laws and Maximum Interest Rates
- Arkansas Maximum Interest Rate is 17% Annually
- Covered in Arkansas State Usury Amendment 89 Section 3
California
California Usury Laws and Maximum Interest Rates
- California Maximum Interest Rate is 7% Annually for undocumented loans
- California Maximum Interest Rate is 10% for documented loans
- Special rules apply for loans used primarily for real estate
- Covered in California Article XV Usury Section 1
Colorado
Colorado Usury Laws and Maximum Interest Rates
- Colorado Maximum Interest Rate is 8% Annually for undocumented loans
- Colorado Maximum Interest Rate is 45% for documented loans
- Special rules apply for loans used primarily for real estate
- Covered in Colorado Article 12 Section 5-12-101
Connecticut
Connecticut Usury Laws and Maximum Interest Rates
- Connecticut Maximum Interest Rate is 12% Annually for loans
- Covered in Connecticut State Usury Statute Section 37-4
Delaware
Delaware Usury Laws and Maximum Interest Rates
- Delaware Maximum Interest Rate is 5% Annually over the Federal Reserve discount rate
- Covered in Delaware State Usury Statute Section 2301 Title 6
Florida
Florida Usury Laws and Maximum Interest Rates
- Florida Maximum Interest Rate is 18% Annually for loans under $500,000
- Florida Maximum Interest Rate is 25% for loans $500,000 or more
- Covered in Florida State Usury Statute 687.03
Georgia
Georgia Usury Laws and Maximum Interest Rates
- Georgia Maximum Interest Rate is 7% Annually for undocumented loans
- Georgia Maximum Interest Rate is 16% Annually for documented loans under $3000
- Georgia Maximum is Unlimited for documented loans $3000 or higher
- Covered in Georgia State Usury Code Section 7-4-2
Hawaii
Hawaii Usury Laws and Maximum Interest Rates
- Hawaii Maximum Interest Rate is 10% annually for documented loans
- Hawaii Maximum Interest Rate is 12% annually for undocumented loans
- Covered in Hawaii State Usury Statute 478-2
Idaho
Idaho Usury Laws and Maximum Interest Rates
- Idaho Maximum Interest Rate is 12% annually for undocumented loans
- No Llimit for documented loans
- Covered in Idaho Statute Title 28 Chapter 22
Illinois
Illinois Usury Laws and Maximum Interest Rates
- Illinois Maximum Interest Rate is 9%
- Covered in Illinois Statute Chapter 17 Section 4
Indiana
Indiana Usury Laws and Maximum Interest Rates
- Indiana Maximum Interest Rate is 8% Annually for undocumented loans
- Indiana Maximum Interest Rate is 25% Annually for documented loans
- Covered in Indiana State Code 24-4.5-3-201 Chapter 3
Iowa
Iowa Usury Laws and Maximum Interest Rates
- Iowa Maximum Interest Rate is 5% Annually for undocumented loans
- Iowa Maximum Interest Rate is 2% above the monthly average 10-year interest rate of the Federal Reserve for documented loans
- Covered in Iowa State Code 2020 535.2
Kansas
Kansas Usury Laws and Maximum Interest Rates
- Kansas Maximum Interest Rate is 10% Annually for undocumented loans
- Kansas Maximum Interest Rate is 15% for documented loans
- Covered in Kansas State Usury Article 2
Kentucky
Kentucky Usury Laws and Maximum Interest Rates
- Kentucky Maximum Interest Rate is 8% annually for undocumented loans
- Kentucky Maximum Interest Rate is 4% over the discount rate of the 90-day Federal Reserve rate for documented loans
- Kentucky Maximum Interest Rate is Unlimited for loans greater than $15,000
- Covered in Kentucky State Usury Law Title XXIX Chapter 36
Louisiana
Louisiana Usury Laws and Maximum Interest Rates
- Louisiana Maximum Interest Rate is 12% Annually for loans
- Covered in Louisiana State Usury Revised Statute 9:3500
Maine
Maine Usury Laws and Maximum Interest Rates
- Maine Maximum Interest Rate is 6% Annually for loans
- Covered in Maine State Usury Statute 432
Maryland
Maryland Usury Laws and Maximum Interest Rates
- Maryland Maximum Interest Rate is 6% Annually for undocumented loans
- Maryland Maximum Interst Rate is 8% Annually for documented loans
- Covered in Maryland State Usury Code 57
Massachusetts
Massachusetts Usury Laws and Maximum Interest Rates
- Massachusetts Maximum Interest Rate is 6% Annually for undocumented loans
- Massachusetts Maximum Interest Rate is 20% Annually for documented loans
- Covered in Massachusetts State Code Title XV Chapter 107 Section 3
Michigan
Michigan Usury Laws and Maximum Interest Rates
- Michigan Maximum Interest Rate is 5% Annually for undocumented loans
- Michigan Maximum Interest Rate is 7% Annually for documented loans
- Covered in Michigan State Usury Code Chapter 483 Act 326
Minnesota
Minnesota Usury Laws and Maximum Interest Rates
- Minnesota Maximum Interest Rate is 6% Annually for undocumented loans
- Minnesota Maximum Interest Rate is 8% Annually for documented loans
- No Limit for loans of $100,000 or higher
- Covered in Minnesota State Statute 334.01
Mississippi
Mississippi Usury Laws and Maximum Interest Rates
- Mississippi Maximum Interest Rate is 8% annually for undocumented loans
- Mississippi Maximum Interest Rate is the greater of 15% or 5% above the Federal Reserve discount rate annually for documented loans
- Covered in Mississippi State Title 75 Chapter 17 Section 75-17-1
Missouri
Missouri Usury Laws and Maximum Interest Rates
- Missouri Maximum Interest Rate is the Greater of 10%
- If the market rate equivalent to the monthly index of long term government bond yields is higher, the maximum interest rate is the Market Rate plus 3% rounded to the nearest 1/10 percent
- Covered in Missouri Statute 408.30
Montana
Montana Usury Laws and Maximum Interest Rates
- Montana Maximum Interest Rate is 15% or the greater of 6% plus the prime rate by the Federal Reserve
- Covered in Montana Statute 31-1-107
Nebraska
Nebraska Usury Laws and Maximum Interest Rates
- Nebraska Maximum Interest Rate is 16% Annually for loans
- Unlimited for loans $25,000 or more
- Covered in Nebraska Statute 45-101.03
Nevada
Nevada Usury Laws and Maximum Interest Rates
- Nevada Maximum Interest Rate is 2% Annually plus the Nevada Prime Rate for undocumented loans
- No Stated Maximum Rate for documented loans
- Covered in Nevada Statute 99.040
New Hampshire
New Hampshire Usury Laws and Maximum Interest Rates
- New Hampshire Maximum Interest Rate is 10% Annually for undocumented loans
- No Stated Maximum for documented loans
- Covered in New Hampshire Statute Section 336:1
New Jersey
New Jersey Usury Laws and Maximum Interest Rates
- New Jersey Maximum Interest Rate is 6% Annually for undocumented loans
- New Jersey Maximum Interest Rate is 16% for documented loans
- Covered in New Jersey Statute Section 31:1-1
New Mexico
New Mexico Usury Laws and Maximum Interest Rates
- New Mexico Maximum Interest Rate is 15% Annually for undocumented loans
- No Stated Maximum for documented loans
- Covered in New Mexico Statute Article 8 Section 56-8-3
New York
New York Usury Laws and Maximum Interest Rates
- New York Maximum Interest Rate is 6% Annually for undocumented loans
- New York Maximum Interest Rate is 16% for loans that are documented
- Covered in New York Code Title 5 Section 501
North Carolina
North Carolina Usury Laws and Maximum Interest Rates
- North Carolina Maximum Interest Rate is 8% Annually for documented loans
- No Stated Maximum for loans of $25,000 or more and agreed upon in writing
- Covered in North Carolina Article Chapter 24
North Dakota
North Dakota Usury Laws and Maximum Interest Rates
- North Dakota Maximum Interest Rate is 6% Annually for undocumented loans
- North Dakota Maximum Interest Rate of 5.5% plus the current cost as reflected by the average rate of interest payable on U.S. treasury bills maturing in six months for documented agreements
- Covered in North Dakota Code Chapter 47-14
Ohio
Ohio Usury Laws and Maximum Interest Rates
- Ohio Maximum Interest Rate is 8% Annually for undocumented loans
- No Stated Maximum for loans of $100,000 or more for documented loans
- Covered in Ohio Revised Code Chapter 1343
Oklahoma
Oklahoma Usury Laws and Maximum Interest Rates
- Oklahoma Maximum Interest Rate is 6% Annually for undocumented loans
- No Stated Maximum for documented loans
- Covered in Oklahoma Title 15 Chapter 6 Section 266
Oregon
Oregon Usury Laws and Maximum Interest Rates
- Oregon Maximum Interest Rate is 9% Annually for loans that are undocumented
- No Stated Maximum Rate for loans that are documented
- Covered in Oregon Statute Chapter 82
Pennsylvania
Pennsylvania Usury Laws and Maximum Interest Rates
- Pennsylvania Maximum Interest Rate is 6% Annually
- Covered in Pennsylvania Statute 201
Rhode Island
Rhode Island Usury Laws and Maximum Interest Rates
- Rhode Island Maximum Interest Rate is 12% Annually for undocumented loans
- Rhode Island Maximum Interest Rate of 21% for documented loans
- Covered in Rhode Island Statute 6-26-01 Title 6 Chapter 6
South Carolina
South Carolina Usury Laws and Maximum Interest Rates
- South Carolina Maximum Interest Rate is 8.75% Annually
- Covered in South Carolina Title 34 Chapter 31
South Dakota
South Dakota Usury Laws and Maximum Interest Rates
- South Dakota Maximum Interest Rate is 12% Annually for undocumented loans
- No Stated Maximum Interest Rate for loans agreed to in writing
- Covered in South Dakota Statute 54-3-1.1
Tennessee
Tennessee Usury Laws and Maximum Interest Rates
- Tennessee Maximum Interest Rate is 8.75% Annually
- Covered in Tennessee Code Title 47 Chapter 14
Texas
Texas Usury Laws and Maximum Interest Rates
- Texas Maximum Interest Rate is 6% Annually for loans that are documented
- Texas Maximum Interest Rate is 10% Annually for loans that are undocumented
- Covered in Texas Code Title 4 Subtitle A Chapter 302
Utah
Utah Usury Laws and Maximum Interest Rates
- Utah Maximum Interest Rate is 10% Annually for undocumented loans
- No Maximum Interest Rate for loans that are documented
- Covered in Utah Statute 15-1-1
Vermont
Vermont Usury Laws and Maximum Interest Rates
- Vermont Maximum Interest Rate is 12% Annually
- Covered in Vermont Statute Title 9 Chapter 4
Virginia
Virginia Usury Laws and Maximum Interest Rates
- Virginia Maximum Interest Rate is 6% Annually for undocumented loans
- 12% Annually for loans that are documented
- Covered in Virginia Code Chapter 3
Washington
Washington Usury Laws and Maximum Interest Rates
- Washington Maximum Interest Rate is 12% Annually for undocumented loans
- Washington Maximum Interest Rate is %12 Annually or 4% higher than the average 26-week Treasury Bill for documented loans
- Covered in Washington Code Title 19 Chapter 19.52
West Virginia
West Virginia Usury Laws and Maximum Interest Rates
- West Virginia Maximum Interest Rate is 6% annually for undocumented loans
- West Virginia Maximum Interest Rate is 8% Annually for documented loans
- Covered in West Virginia Code Chapter 47 Article 6
Wisconsin
Wisconsin Usury Laws and Maximum Interest Rates
- Wisconsin Maximum Interest Rate is 5% Annually for undocumented loans
- No Stated Maximum Rate for documented loans
- Covered in Wisconsin Statute 138.04
Wyoming
Wyoming Usury Laws and Maximum Interest Rates
- Wyoming Maximum Interest Rate is 7% Annually for undocumented loans
- No Stated Maximum Interest Rate for loans agreed to in writing
- Covered in Wyoming Statute 40-14-106
Washington D.C. (District of Columbia)
Washington D.C. Usury Laws and Maximum Interest Rates
- Washington D.C. Maximum Interest Rate is 6% Annually for undocumented loans
- Washington D.C. Maximum Interest Rate is 12% Annually for loans that are documented
- Covered in Washington D.C. Code Chapter 33
What to Know Before the Real Estate Exam
Usury is an illegal practice that scams homebuyers into paying higher interest rates on mortgage loans. Because usury laws vary from state to state, real estate professionals need to know how interest rates work in their region.
Knowing how usury and interest rates work in real estate is crucial to passing the exam. But usury isn’t the only important term that you’ll need to know before testing day.
Need extra help studying? Check out our online Real Estate Flashcards and brush up on some crucial terms!
