Could Your High Interest Rate Be Illegal?

When you apply for a car loan, a credit card or a mortgage you know you’re going to have to pay interest. The question is how much you’re willing to pay in interest to borrow that money: 5%? 20%? What if you were asked to pay 300% interest?

The morality of high interest rates has been in the news recently, with Pope Francis condemning the practice as a “scourge.” During a weekly general audience, the Pope said, “When a family has nothing to eat, because it has to make payments to usurers, this is not Christian, it is not human!”

Usury — its definition, legality and even morality — has been debated for centuries. At various points in history, religious and governmental leaders have spoken out against it or argued about the types of activities it encompasses. In some cases, lending money and charging any interest at all is considered usurious. In other cases, usury refers to charging excessive interest.

Perhaps this definition from William Blackstone’s Commentaries on the Laws of England best captures the debate:

When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.

In the U.S. today, the term usury generally refers to lending money at interest rates that exceed state law. And, yes, it apparently still exists.

New York Attorney General Eric T. Schneiderman, for example, recently cracked down on several out-of-state lenders who allegedly violated New York’s usury law by charging residents interest rates ranging from 89% to more than 355%.

While states can and sometimes do cap interest rates that can be charged for certain types of loans, they can’t stop out-of-state national banks from selling higher-rate products to their citizens. Not to mention the fact that many states have repealed usury laws or raised interest rate limits for lenders within their borders.

In addition, 38 states have laws allowing small short-term loans, known as payday loans, according to the National Conference on State Legislatures. Some cap rates, but others don’t. As a result, rates on these loans can be very high — 300% to 1,000% or even more. There are efforts in some states to limit the rates on these loans to something more affordable to borrowers.

And then there is the issue of fees. In some cases, interest rates are capped but fees are not. In others, state law may restrict fees to a reasonable level, but when coupled with interest, the cost to the consumers is effectively much higher.

Lenders argue that they need to charge high rates to account for the risk they take when making these loans to borrowers with limited credit histories or bad credit.

To borrowers, of course, it’s all the same whether it’s called interest or fees, and whether it’s defined as usury or not. It’s still more money they have to earn in order to pay back the lender.

And to the Pope, it’s sinful. What do you think?