Interest rates do vary by state, because every state sets its own usury cap on what a lender can charge, and those caps range from single digits to effectively unlimited. But the rate you actually pay often has less to do with where you live than with where your lender is chartered. Federal law lets banks charge their home state’s rate to customers anywhere in the country, which is why a credit card issued to you in a strict-cap state can still carry an interest rate your state would otherwise prohibit.
Every State Sets Its Own Usury Cap
A usury law is a statute that caps the interest a lender can charge before the loan is considered illegally expensive. Every state has one in some form, and the ceilings vary widely. Some states set general limits as low as 6 percent for ordinary personal loans. Others allow much higher rates or exempt entire categories of lending. A couple impose no meaningful cap at all on larger loan amounts. A loan that is perfectly legal in one state can violate the law a few miles across a border.
These state caps bind two groups most directly: state-chartered banks operating under their home state’s rules, and nonbank lenders who must be licensed separately in each state where they do business. A finance company lending in multiple states holds a separate license from each, and each license confines it to that state’s rate rules.
Because the United States operates under a dual banking system, banks can choose either a federal or a state charter. A nationally chartered bank answers to the Office of the Comptroller of the Currency and follows federal law. A state-chartered bank answers to its home state’s banking department. Two lenders in the same city, offering the same product to the same borrower, can legally charge different rates because their charters subject them to different ceilings.1U.S. Office of the Comptroller of the Currency. National Banks and the Dual Banking System
Why Your Lender Can Ignore Your State’s Cap
A nationally chartered bank does not have to follow the usury laws of every state where it has customers. Federal law lets it charge interest at the rate allowed by the state where the bank itself is located, or at 1 percent above the Federal Reserve’s discount rate on ninety-day commercial paper, whichever is greater.2Office of the Law Revision Counsel. 12 U.S.C. 85 – Rate of Interest on Loans, Discounts and Purchases If the bank’s charter state has a high ceiling, the bank charges that rate to customers everywhere.
The Supreme Court cemented this framework in 1978 in Marquette National Bank v. First of Omaha Service Corp. The Court held that a national bank headquartered in Nebraska could charge Nebraska’s interest rate to credit card customers in Minnesota, even though Minnesota’s cap was lower. The bank was “located” where it was chartered, not where its customers lived.3Justia Law. Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978)
The industry calls this “rate exportation.” A bank exports its home-state rate to borrowers in every other state. The decision transformed the credit card industry: lenders could serve customers nationwide while following only one state’s rate rules, and they set up shop in whichever state offered the most permissive terms.
National banks are not the only ones with this power. In 1980, Congress extended the same authority to state-chartered banks through the Depository Institutions Deregulation and Monetary Control Act. Any FDIC-insured state-chartered bank can now charge interest at the rate permitted by its home state, overriding the usury laws of the borrower’s state.4Office of the Law Revision Counsel. 12 U.S.C. 1831d – State-Chartered Insured Depository Institutions and Insured Branches of Foreign Banks Congress wanted state-chartered banks to compete on equal footing with national ones.
The net effect is a tiered system. A local credit union or a state-licensed finance company must follow your state’s cap. A large bank, whether federally or state-chartered, generally does not.
Why Credit Card Issuers Cluster in a Few States
After Marquette, financial institutions relocated or chartered new entities in states with high or nonexistent rate ceilings. Some states actively courted the industry by removing usury caps for bank lending, and major card issuers followed. This explains one of the most common consumer puzzles: you live in a strict-cap state, yet your credit card charges well above what that state allows. The issuer is chartered in a state that permits the rate, and federal law lets the bank export it to you.
States that kept strict caps effectively drove the lending business to other jurisdictions without lowering the rates their own residents actually paid. The borrower got the high rate anyway; the banking jobs and tax revenue went elsewhere.
The Type of Loan Changes the Cap
Even within the same state and the same lender type, different categories of credit carry different rate caps. A state might limit general-purpose personal loans to a single-digit rate while allowing licensed payday lenders to charge fees that translate to annual percentage rates above 300 percent on a two-week advance. Most states that permit payday lending set fees at $10 to $20 per $100 borrowed, which looks modest until you annualize a two-week loan.
State legislatures write separate statutes for mortgages, auto financing, credit cards, and small-dollar loans because each product carries different risk and servicing costs. Roughly 45 states cap rates on at least some categories of consumer installment loans, but the thresholds and exemptions differ widely by product.
Mortgages Are Largely Exempt
Federal law adds another layer for home loans. Regulations implementing the Depository Institutions Deregulation and Monetary Control Act preempt state usury limits entirely for federally related first mortgages made after March 31, 1980. It does not matter whether the state limit is criminal or civil, because the federal statute preempts any state ceiling on first-mortgage interest.5eCFR. 12 CFR Part 190 – Preemption of State Usury Laws That is why mortgage rates are set almost entirely by market forces, competition, and your credit profile rather than by state caps.
Credit Unions Follow a Different Ceiling
Federal credit unions operate under their own framework. The Federal Credit Union Act sets a default ceiling of 15 percent per year on member loans.6Office of the Law Revision Counsel. 12 U.S.C. 1757 – Powers The National Credit Union Administration Board can temporarily raise it, and it has done so repeatedly. The current temporary ceiling is 18 percent, extended through September 2027. For payday alternative loans, a short-term product designed to compete with payday lenders, federal credit unions can charge up to 28 percent.7National Credit Union Administration. Permissible Loan Interest Rate Ceiling Extended
These limits sit noticeably below what most banks can charge, which is one reason credit union loan rates tend to be cheaper. Membership requirements and narrower product menus are the tradeoff.
Military Borrowers Get a Federal Floor
Two federal laws override state rules and lender charter type for servicemembers.
The Servicemembers Civil Relief Act caps interest at 6 percent per year on debts a servicemember took out before entering active duty. The lender must forgive any interest above that threshold for the duration of military service, and for mortgage obligations the cap extends for an additional year after service ends.8Office of the Law Revision Counsel. 50 U.S.C. 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service The protection covers joint loans with a spouse, and forgiven interest cannot be added back later.9U.S. Department of Justice. Your Rights as a Servicemember: 6% Interest Rate Cap for Servicemembers on Pre-service Debts
The Military Lending Act addresses new borrowing. It prohibits any creditor from charging more than a 36 percent Military Annual Percentage Rate on consumer credit extended to active-duty servicemembers and their dependents.10Office of the Law Revision Counsel. 10 U.S.C. 987 – Terms of Consumer Credit Extended to Members and Dependents: Limitations The 36 percent MAPR includes interest, finance charges, credit insurance premiums, and most fees. The MLA covers credit cards, payday loans, vehicle title loans, and most installment loans, but excludes standard auto purchase loans and most home mortgages.11Consumer Financial Protection Bureau. Military Lending Act (MLA)
When the Rules Get Murky
Rate exportation works cleanly when a bank originates and holds a loan. It gets murkier when a bank partners with a financial technology company. In a typical arrangement, the bank technically originates the loan at its home-state rate, then sells it to the fintech partner, which services the account and bears the economic risk. State regulators have challenged whether the bank is really the lender at all, or is renting its charter so the fintech can bypass state caps.
Courts examining these partnerships look at who bears default risk, who controls underwriting, who services the loans, and who keeps the profits. In one widely cited case, the non-bank partner serviced the loans, bore all default risk, paid all legal expenses, retained 99 percent of the profits, and indemnified the bank against every claim. On facts like that, a court may find the bank is the lender in name only, stripping away preemption and subjecting the loan to the borrower’s home-state cap.
A related question came up in the Second Circuit’s Madden v. Midland Funding decision. When a national bank sells a loan outright to a non-bank debt buyer, does the buyer inherit the bank’s federal preemption? The court said no. If the debt buyer owns the loan and collects interest on its own behalf, state usury law applies, because enforcing that law would not significantly interfere with any national bank power.
No court has produced a definitive checklist, and outcomes turn on the specific facts of each arrangement. For borrowers, a loan arranged through a bank-fintech partnership may carry a rate your state would otherwise prohibit, and whether that rate is legally enforceable depends on contractual details you will almost certainly never see. This corner of the law is still moving.