Loaning money with interest is legal in every U.S. state. What is regulated is how much interest you can charge, whether you have to be licensed to do it, and how the interest you collect gets taxed. Cross a state’s usury cap and the penalty lands on you as the lender: forfeited interest, an unenforceable loan, and in some places criminal liability. Stay inside the rules and a private loan with interest is an ordinary, lawful transaction.
State Usury Caps Set the Ceiling
Every state has some form of usury law limiting the interest rate a lender can charge, but the caps swing widely. For a typical consumer installment loan, the median state cap sits around 27% APR. Some states allow rates as high as 40% to 60% on certain loan products. Roughly a dozen states and the District of Columbia have adopted caps at or below 36%. A few states set no numerical ceiling and instead prohibit “unconscionable” rates, leaving courts to decide case by case what crosses the line.
The type of loan matters too. Most states treat consumer loans and commercial loans separately, and mortgages, auto loans, credit cards, and small-dollar payday loans often each have their own rate rules. A rate that is legal for one product can be usurious for another in the same state.
If you are lending as a private individual, the state cap where the loan is made applies in full. There is no federal preemption available to you. Pick your rate with your state’s consumer-loan cap in mind, and if your state uses a floating standard rather than a hard number, err well below what a court might call unconscionable.
Why Credit Cards Can Charge More Than Your State Allows
People sometimes assume that if their credit card charges 24% and their state caps interest at 12%, the card issuer is breaking the law. It isn’t. Federal law lets a nationally chartered bank charge the interest rate permitted in the state where the bank is located, not where the borrower lives.1Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest Allowed The Supreme Court confirmed this in 1978.2Legal Information Institute. Marquette National Bank of Minneapolis v First of Omaha Service Corp
That preemption is not available to individuals or to non-bank lenders. If you are a person lending money to another person, your state’s cap governs, full stop.
The IRS Rules That Catch Private Lenders
Interest You Earn Is Taxable
Any interest you collect on a personal loan is taxable income. You have to report it on your federal return whether or not anyone issues you a Form 1099-INT.3Internal Revenue Service. Topic No. 403 – Interest Received Informal family loans get caught by this rule as often as any other. If money changes hands and interest is part of the deal, the IRS treats it as investment income to you.
Charge Too Little and the IRS Charges You Anyway
Lending at zero interest or below a market rate creates its own tax problem. When you charge less than the IRS’s Applicable Federal Rate (AFR), the difference is treated as a gift from you to the borrower and as imputed interest income back to you. You can end up owing tax on interest you never collected.4Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Two safe harbors matter here. Loans of $10,000 or less between individuals are exempt from the imputed interest rules, provided the borrower doesn’t use the money to buy income-producing assets like stocks or a rental. For loans between $10,000 and $100,000, imputed interest is capped at the borrower’s actual net investment income for the year, and if that investment income is under $1,000, it counts as zero.4Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
For April 2026, the AFRs run roughly 3.59% for short-term loans (three years or less), 3.82% for mid-term loans (three to nine years), and 4.62% for long-term loans (over nine years).5Internal Revenue Service. Rev. Rul. 2026-7 Applicable Federal Rates Charging at least the AFR for your loan term ends the imputed interest question.
When Lending Stops Being Personal
Making an occasional loan to a friend or relative doesn’t require a license. The line shifts when lending looks like a business. Every state requires licensing for entities that regularly make consumer loans. The specific triggers vary: some states count the number of loans per year, others look at whether you advertise lending services or charge fees on top of interest.
Payday lending, auto title lending, and small consumer loan operations each have their own state licensing regimes. Operating without a required license is itself a violation and can void the loans entirely. If you are lending repeatedly to different borrowers, advertising, or charging fees that look like a lending business, you may need to be licensed even if you think of yourself as just helping people out.
A Stricter Rule for Military Borrowers
If your borrower is an active-duty servicemember or a dependent, a federal cap applies on top of your state’s cap. The Military Lending Act limits the military annual percentage rate to 36% on most consumer credit, and the MAPR calculation sweeps in finance charges, credit insurance premiums, and add-on fees that a regular APR would leave out.6Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents7Consumer Financial Protection Bureau. Military Lending Act (MLA)
The penalties are heavy. A loan above the 36% MAPR is void from the start, so the borrower owes nothing. The lender faces minimum civil damages of $500 per violation plus potential punitive damages and attorney fees, and knowing violations carry criminal penalties of up to one year in prison.
What Happens if You Charge Too Much
Usury consequences fall on the lender, and they escalate with how bad the violation is and where it happens.
- Interest forfeiture is the most common outcome. A court finds the rate usurious, and the borrower owes only the original principal with all interest wiped out. Many states also award the borrower double the interest already paid, plus attorney fees.
- In some states, and under the MLA for servicemembers, the entire loan is void from the start. You lose the interest and the right to collect the principal.
- Even where a loan isn’t formally voided, a court may refuse to enforce it. Sue on a usurious note and the case can be dismissed.
- Some states treat extreme usury as a criminal offense. Federal law also criminalizes extortionate lending, meaning the use of threats or violence to collect on high-interest debts.
Genuine math errors are treated more leniently than intentional overcharging. Most states provide a defense for bona fide computational mistakes, limiting your liability to refunding the overcharge rather than forfeiting the whole loan. That defense disappears if you knowingly set a rate above the legal limit.
A Practical Checklist for a Private Lender
If you are an individual thinking about lending money and charging interest, the framework is more forgiving than most people assume, but the details matter.
- Keep the rate at or below your state’s usury cap for consumer loans.
- Charge at least the IRS Applicable Federal Rate for your loan term to avoid imputed interest.
- Put the terms in writing: principal, interest rate, repayment schedule, and default consequences. A loan running longer than a year without a written agreement can hit enforceability problems under most states’ statute of frauds.
- Report the interest you earn on your federal return, whether or not a 1099 is filed.
- If your borrower is an active-duty servicemember or dependent, stay under the 36% MAPR and count every fee.
Under $10,000, you have the most room. The IRS won’t impute interest, and most states treat small personal loans as outside licensing requirements. Above that, the tax rules tighten. Lend to multiple people on any regular schedule and you are close to the point where your state expects a license regardless of the amounts involved.