DEFINITION of 'Usury'

Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. Usury first became common in England under King Henry VIII and originally pertained to charging any amount of interest on loaned funds. Over time it evolved to mean charging excess interest, but in some religions and parts of the world charging any interest is considered illegal.

BREAKING DOWN 'Usury'

Charging interest on loans is not a new concept, but in 16th-century England, limitations were put on the amount of interest that one could legally charge on a loan. However, throughout history, certain religions have abstained from usury altogether as charging interest went against their core principles. Given that early lending was done between individuals and small groups, in contrast with the modern banking system used today, setting firm social standards for lending terms was deemed essential.

Specifically, Judaism, Christianity and Islam (the three Abrahamic faiths) take a very strong stance against usury. Several passages in the Old Testament condemn the practice of usury, especially when lending to less wealthy individuals without access to more secure means of financing. In the Jewish community this created the rule of lending money at interest only to outsiders. The Old Testament’s condemnation of usury also led to the Christian tradition against money lending. Some Christians believe that those who lend should not expect anything in return. The Protestant Reformation in the 16th century brought about a distinction between usury (charging high interest rates) and the more acceptable lending of money at low interest rates. Islam, on the other hand, has historically not made this distinction.

Usury Laws and Predatory Lending

Today, usury laws help protect investors from predatory lenders.

Predatory lending is broadly defined by the FDIC as “imposing unfair and abusive loan terms on borrowers." Predatory lending often targets groups with less access to and understanding of more traditional forms of financing. Predatory lenders can charge unreasonably high interest rates and require significant collateral in the likely event a borrower defaults.

Predatory lending is also affiliated with payday loans, also termed payday advances or small dollar loans, among other names. Payday loans are small-sum, short-term unsecured loans, which can appear to carry substantial risk to the lender. To prevent usury, some jurisdictions limit the annual percentage rate (APR) that a payday lender can charge, while others outlaw the practice entirely.

RELATED TERMS
  1. Peer-To-Peer Lending (P2P)

    Peer-to-peer (P2P) lending is a method of debt financing that ...
  2. Predatory Pricing

    Predatory pricing is the act of setting prices extremely low ...
  3. Delaware Corporation

    A Delaware corporation enjoys the benefits of being registered ...
  4. Interest

    Interest is the charge for the privilege of borrowing money, ...
  5. Bank Lending Survey

    Bank Lending Survey is a questionnaire circulated by a country's ...
  6. Interest Rate

    Interest rate is the amount charged, expressed as a percentage ...
Related Articles
  1. Personal Finance

    Title Loans vs. Payday Loans: Which Are Better?

    Both title loans and payday loans carry risks that outweigh the benefits.
  2. Tech

    What Goldman Sachs’s Online Lending Means For Banking

    Recently Goldman Sachs has announced its entry into the online lending space. Most commonly known as an investment bank, Goldman’s newest venture may provide insight into the future of online ...
  3. Insights

    Google Bans Ads for Payday Lenders (GOOG, GOOGL)

    Beginning in July, Google will ban lenders that charge annual percentage rates higher than 36%, since "these loans can result in unaffordable payment and high default rates for users."
  4. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  5. Personal Finance

    5 Reasons To Avoid Payday Loans

    Although payday loans may seem like an attractive option in a pinch, they may also leave you worse off in the long run.
  6. Investing

    The Role of Securities Lending in ETF Returns

    ETFs produce significant revenue by lending out securities, but there are risks associated with the practice.
  7. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  8. Personal Finance

    Peer-To-Peer Lending - Determining The Future Of Banking Across The World

    The peer-to-peer lending industry continues to flourish. What does this mean for the future of loans from banks?
  9. Personal Finance

    Peer-to-Peer Lending Breaks Down Financial Borders

    Find out why banks are no longer the only option for a loan, and how the P2P lending system operates without them.
RELATED FAQS
  1. Asset-Based Lending Vs. Asset Financing

    Is there an actual difference between asset-based lending and asset financing? Read Answer >>
Trading Center