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Definition: Usury Laws
Usury laws are laws or regulations that protect borrowers from exceptionally high interest rates charged by the lenders. Usury refers to the unlawful or illegal practise of charging high interest rates, on an issued debt than the rate that is permitted to be charged as prescribed by the local law. Usury laws set caps on the maximum rate of interest that a lender may charge on the issued debt.
In the U.S. the legal authority of regulating the maximum cap on the rate of interest that can be levied, rests with the individual states. For example, Washington State regulates that the maximum rate of interest that a lender may charge can be 4% above the Federal Reserve rate quoted on the 26-week Treasury bills. If the Federal Reserve 26-week Treasury bills quote an yield of 8%, the Usury law for Washington state allows the lender to charge a maximum level of 8% + 4% = 12% as the rate of interest on the loan amount issued to the borrower.
If the rate of interest that is charged by a lender is above this maximum prescribed limit, the lender will lose the right to sue the borrower in the event of default as a result of the illegal rate of interest that was charged on the debt. Several exceptions made to the Usury law include loans made for commercial, agricultural or business purposes, credit card debt, etc.