Usury laws are state statutes that cap the interest a lender can charge on a loan, and they set penalties, sometimes severe ones, for lenders who go over that cap. Every state has some version of these limits, but the numbers, the exemptions, and the consequences vary widely. The catch most borrowers don’t realize: federally regulated banks and credit unions are largely exempt from state caps, which is why a credit card can legally charge 25% or more in a state that caps interest far lower.
The Two Numbers Every State Sets
Most states publish two different figures, and it matters which one applies to your situation.
The first is a legal rate. This is the default interest that kicks in when a loan agreement doesn’t specify a rate at all. It shows up more often than you’d expect: informal loans between family members, court judgments, and contracts that simply forgot to address interest. Legal rates run roughly from 5% to 15% a year, and many states peg theirs to a floating benchmark such as the Federal Reserve discount rate.
The second is a contract rate. This is the hard ceiling — the highest rate a lender and borrower can agree to in writing. When people talk about usury caps, this is almost always the number they mean. A lender who charges above this ceiling faces penalties whether or not the borrower signed off on the rate. Contract caps also vary a lot. Some states hold consumer loans below 10%. Others allow above 20% or tie the number to market indicators.
Fees Can Count as Interest
Usury analysis doesn’t stop at the rate printed on the loan. Courts look at the total cost of borrowing and treat many fees as disguised interest if they function as compensation to the lender for extending credit. The Supreme Court, interpreting federal banking law, held that “interest” includes late fees, insufficient-funds fees, overlimit fees, annual fees, cash advance fees, and membership fees tied to credit.1Legal Information Institute. Smiley v. Citibank (South Dakota), NA State usury analysis uses the same broad approach.
What generally doesn’t count: genuine third-party costs like appraisal fees, credit report fees, title insurance premiums, and document preparation fees, because those pay someone other than the lender. The line is whether the charge compensates the lender for making credit available or pays a third party for a real service. Labeling something a “processing fee” or “service fee” doesn’t protect it if a court concludes the fee is really extra interest under a different name.
Which Loans Usury Caps Cover
The caps apply to loans and forbearances of money where a borrower repays a principal sum with interest. Personal loans, private lending between individuals, credit lines, and most consumer financing all fall inside. Protections focus on everyday borrowers, not sophisticated commercial parties.
Business Loans Often Don’t Qualify
Most states draw a sharp line between consumer and commercial borrowing. Consumer transactions get the full protection of the cap; business loans frequently face higher ceilings or no cap at all. The reasoning is that businesses negotiate financing as part of their operations and bring more bargaining power to the deal. Borrowing for a business purpose? Check whether your state exempts the transaction entirely before assuming usury caps protect you.
The Time-Price Doctrine
Retail installment sales sit outside usury law under an old doctrine that still matters. When a seller offers a product at one price for cash and a higher price on credit, the difference between those two prices is not “interest.” It is the seller’s right to charge more for deferred payment. This is why a furniture store or car dealership can finance a purchase at rates that would violate usury caps if the same deal were structured as a loan: the seller never loaned money, they sold goods at a time-price. Most states recognize the distinction, and it removes retail installment contracts and many seller-financed deals from usury regulation altogether.
First-Lien Home Mortgages
First-lien residential mortgages sit in their own category. Federal law preempts state interest rate caps for virtually all first-lien residential mortgage loans made after March 31, 1980, no matter who makes the loan.2Office of the Law Revision Counsel. 12 USC 1735f-7a – State Constitution or Laws Limiting Rate or Amount of Interest States can pass legislation opting out of that preemption, and some have.3Federal Deposit Insurance Corporation. Federal Interest Rate Authority For most borrowers, though, state usury caps are not what constrains the mortgage rate they’re offered.
Why Your Credit Card Rate Ignores the Cap
If your state caps interest at 12% but your credit card charges 29%, nothing has gone wrong from the lender’s side. Federal law gives banks and credit unions their own interest rate authority that overrides state usury limits. This is the deliberate architecture of American banking regulation, and it explains most of the rates consumers actually see.
National Banks Can Export Their Home State’s Rate
The National Bank Act allows a nationally chartered bank to charge interest at the rate permitted by the state where the bank is located, not where the borrower lives.4Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest on Loans, Discounts and Purchases A bank headquartered in a state with no interest ceiling can carry that unlimited rate to borrowers everywhere else. The Supreme Court confirmed this in a decision involving a bank charging out-of-state credit card customers a rate above their local cap.5Legal Information Institute. Marquette National Bank of Minneapolis v. First of Omaha Service Corp. The Court acknowledged that this impairs state usury laws but said changing it was Congress’s job. A later decision extended the rule to fees, treating late fees the same as interest for export purposes.1Legal Information Institute. Smiley v. Citibank (South Dakota), NA That’s why so many major credit card issuers are headquartered in a small handful of lender-friendly states.
State-Chartered Banks Get the Same Treatment
Congress extended essentially the same authority to state-chartered banks insured by the FDIC. A state-chartered, FDIC-insured bank can charge the rate allowed by the state where it’s located, or 1% above the Federal Reserve discount rate, whichever is greater.6Office of the Law Revision Counsel. 12 USC 1831d – State-Chartered Insured Depository Institutions and Insured Branches of Foreign Banks The exportation effect mirrors the national bank rule.
Federal Credit Unions Face a Real Cap
Federal credit unions work differently. The Federal Credit Union Act sets a baseline ceiling of 15% per year on most loans and lets the NCUA Board raise it temporarily when market conditions warrant.7Office of the Law Revision Counsel. 12 USC 1757 – Powers The Board has kept a temporary 18% ceiling in place for decades and most recently extended it through September 2027. Payday alternative loans from credit unions can go up to 28%.8NCUA. Permissible Loan Interest Rate Ceiling Extended Credit union rates tend to run lower than bank rates partly because of this actual federal cap.
Hard Caps for Service Members
Two federal laws set interest ceilings that apply regardless of a lender’s home state. Both protect military service members, and both override the banking exemptions above.
The 6% Cap on Pre-Service Debt (SCRA)
The Servicemembers Civil Relief Act caps interest at 6% per year on any debt a service member took on before entering active duty. That covers mortgages, car loans, credit cards, student loans, and most other pre-service obligations.9Office of the Law Revision Counsel. 50 USC 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service Interest above 6% is forgiven outright, not deferred, and the lender must reduce periodic payments to match. The protection lasts for the length of military service, with an extra year for mortgages.
To trigger the cap, the service member sends written notice to the creditor along with a copy of military orders. The request must be made no later than 180 days after military service ends.10U.S. Department of Justice. Your Rights as a Servicemember: 6% Interest Rate Cap for Servicemembers on Pre-service Debts Joint debts with a spouse are covered when both names are on the account. Refinancing or consolidating while on active duty can wipe out eligibility because the new loan may no longer count as pre-service debt.
The 36% Cap on New Credit (MLA)
The Military Lending Act works from the other direction. It caps the rate on new credit extended to active-duty service members and their dependents at a 36% Military Annual Percentage Rate. That figure includes not just interest but also fees, credit insurance premiums, and other charges built into the cost of the loan.11Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents The MLA covers credit cards, many installment loans, deposit advance products, and overdraft lines of credit. It does not cover residential mortgages or purchase-money auto loans where the vehicle secures the debt.12Federal Reserve. Military Lending Act
What Happens to a Lender Who Charges Too Much
Penalties for usury range from inconvenient to devastating for the lender, depending on the state and whether the violation is civil or criminal.
Civil Penalties
The most common consequence is forfeiture of interest. A lender who charges above the cap loses the right to collect any interest on the loan, not just the excess. Federal law imposes this on national banks: charging above the rate allowed by the bank’s home state results in forfeiture of all interest the loan carries. A borrower who has already paid the excessive interest can sue to recover twice what they paid, if they file within two years.13Office of the Law Revision Counsel. 12 USC 86 – Usurious Interest; Penalty for Taking; Limitations
State penalties follow the same shape with wide variation. The lightest approach forfeits only the excess above the cap. A middle tier, common across many states, forfeits all interest but lets the lender still collect principal. At the harshest end, some states void the entire loan agreement, meaning the lender loses both principal and interest and the borrower walks away owing nothing. Some states also allow treble damages, requiring the lender to pay back three times the usurious interest already collected.
Criminal Usury
A smaller number of states treat usury as a crime when the rate exceeds a threshold well above the civil cap, commonly between 20% and 25% a year. Crossing that line can bring felony charges. The laws were originally written for loan sharks, but they apply to anyone who knowingly charges rates over the criminal threshold. Prosecutors bring these cases, not borrowers.
What Enforcement Actually Looks Like
Usury claims come with deadlines, and some are short. The federal limit for recovering usurious interest from a national bank is two years.13Office of the Law Revision Counsel. 12 USC 86 – Usurious Interest; Penalty for Taking; Limitations State windows commonly run one to six years.
The bigger practical obstacle is that federal preemption removes most usury claims against banks before they start. If your lender is a nationally chartered bank or an FDIC-insured state bank charging a rate allowed by its home state, your state’s usury cap does not apply to the transaction, and there is no violation to enforce no matter how high the rate looks on your statement. Usury caps still matter, but the loans they actually reach tend to be private lending between individuals, non-bank consumer loans that don’t fit within a preemption structure, and contracts that never bothered to set a rate at all.