The concept of usury dates back to the time when human beings started exchanging goods and services with each other. However, the term usury gained popularity in England during the 16th century when King Henry VIII imposed limits on the interest that lenders could charge on loans. This seems to be one of the earliest official declarations of usury as being illegal in the western world.
However, there are some major religions such as Islam, Judaism and Christianity that have always hard a firm position against usury since their founding. This has led to religions such as Islam denouncing all forms of usury up to the present where banks and institutions serving Muslims cannot directly charge interest on any of their products.
However, Judaism only allows lenders to charge interest on loans issued to outsiders, while Christianity originally condemned the charging of interest on loans to poor individuals. The major Christian denominations are opposed to modern-day usury, but allow their members to pay and collect interest from financial institutions such as banks.
Laws against Predatory Lending
The Federal Deposit Insurance Corporation describes predatory lending or usury as the practice of lenders forcing abusive and unfair conditions or terms on borrowers. This type of lending typically targets consumers who have limited or no access to loans from traditional lenders such as banks and building societies. Predatory loans are often characterized by exorbitant interest rates and are usually secured by collateral whose value is much higher than the secured loan amount in order to enrich the lender if the borrower defaults.
A common type of predatory loan is the payday loan, which also known as a small-dollar loan, or a payday advance. Although such loans are usually small and may appear risk-free, they usually have exorbitant interest rates and other unfair terms in case of default. Most authorities have capped the annual percentage rate (APR) that can be charged by payday lenders as a way of discouraging usury.
How Lenders Avoid Usury Laws
Firstly, usury laws are set by the state governments instead of the Federal government, so most lenders typically charge the interest rates of their incorporation state instead of those applicable in the borrower’s state. National banks also apply the same tactic by charging the highest interest rate allowed in the state where they are incorporated. Therefore, most lenders prefer to incorporate their businesses in states such as Delaware, which have more relaxed laws on usury that give the lender significant room to set high interest rates.