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Usury laws limit the interest rate charged on loans. They have existed for thousands of years and are mentioned in religious texts. Usury involves charging an unfair interest rate, which varies by loan type and location. Many countries have deregulated their financial systems, making usury laws less effective. In the US, national banks and pawnbrokers are exempt from state usury laws, allowing for high-interest loans. Advocates argue for a national usury law to protect consumers from predatory lending practices.
Usury laws are laws that limit the amount of interest that can be charged on loans. The practice of regulating interest rates is ancient; documents dating back thousands of years speak of usury and its impact on society. The Old Testament of the Bible, for example, mentions usury in multiple places, as do religious texts for numerous other world religions. Wear and tear continues to be a concern in many modern societies.
Simply put, usury involves charging an interest rate that is considered grossly unfair or unreasonable. For example, loans that put someone’s finances at risk by forcing him to pay large sums of money to service the loan are considered usury. What rate of interest is considered “high” depends on the type of loan and the area in which it is provided, and religious faith can also play a role in causing unreasonable interest rates. Islamic law, for example, is very strict on interest rates and the practice of charging interest.
Usury laws limit the simple interest rate. They can simply limit the interest to a certain percentage, such as eight percent, or they can peg the interest rate to something else. Historically, a number of attempts have been made to regulate usury, ranging from outright bans on interest charging to strict usury laws for all loans. However, in the 20th century, many nations deregulated their financial systems and as a result, usury laws were often made less effective.
The United States is an excellent example of a case where usury laws are largely ineffective, even though they exist. Individual states have usury laws that vary, but national banks and pawnbrokers are exempt from these laws. This means that if a state has a usury law that caps interest at 20%, someone can still get a loan at a higher interest rate. Credit card companies routinely circumvent usury laws, offering rates that can soar well above 10%, and so-called “payday loans” often charge similarly high interest rates.
Advocates for consumers concerned about predatory lending practices have argued that the United States needs a national usury law that will cap interest across the board. Stiff resistance to this idea has been met by financial firms that can take advantage of the existing system. Some institutions argue that they must charge high interest rates on high-risk loans to balance the risk, but consumer advocates believe these high rates often hurt consumers. Indeed, a high interest rate can make a loan riskier by increasing the costs associated with the loan and making it difficult to repay, even for a responsible consumer.
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