The word usury comes from the Latin word usuria. The definition of the word is interest or excessive interest. Technically speaking, this applied to charging for the usage of money in any circumstance. We typically don’t think of a fee for exchanging currencies as interest, but that WAS considered interest back then.
Eventually countries got involved and legislated a maximum legal interest rate. Usury came to be known as the interest rate on a loan above the legal limit.
Historical Context
In the early hundreds CE (common era, often referred to as AD, anno domini), Christian bishops dictated that the clergy and laity could only accept up to a 1% interest rate. Anything in excess was usurious. By the 12th century things intensified: people who received interest could not receive sacraments or Christian burial. And by the 14th century, usury was labeled as heresy and secular legislation allowing it was banned.
Usury has been denounced through history even in its most basic definition of any interest. Who denounced usury? Plato, Aristotle, Cato, Cicero, Seneca, Aquinas, Muhammad, and many more.
Cato in De Re Rustica said:
“And what do you think of usury?” — “What do you think of murder?”
Among many other financial rules, the Islamic faith specifically disallows the charging of interest. Because of that, there are special loans & mortgages for Muslims.
As times changed, so did the Churches. They started allowing interest out of necessity for others. As rates went from around 30% to around 10%, it got harder to claim that interest charges were completely taking advantage of people.
Usury Laws in the U.S.A.
Usury laws are dictated by state statutes. Each state is allowed to set its own maximum interest rate. If a lender does charge an unlawful interest rate, depending on the state laws the loan can be voided from the initial date or the lender can be stuck without the ability to sue for debt recovery.
One large change, though, was with the Supreme Court Case Marquette National Bank of Minneapolis vs. First of Omaha Service Corp. The decision in this case allowed nationally-chartered banks to charge the maximum legal interest rate in their state regardless of the borrowers state. This led to an exodus of banks from states with strict interest rate laws. Because of this ruling, banks could now charter themselves in a state like Delaware and then charge higher interest rates than previously allowed in other states.
When the Depository Institutions Deregulation and Monetary Control Act was passed in 1980, it effectively overrode state and local usury laws. The act exempted Federally charted savings banks and a few others from usury laws. One of the few things that is still protected, though, is the fact that costs and charges must be disclosed.
Credit Is Not Needed
Remember, though, that credit and debt are avoidable. If you don’t borrow, you don’t have to worry about paying interest to anyone.
Hopefully this short history lesson about usury and interest was educational. If you look further into it you will find that a lot of moral arguments have been made against interest. It really makes you think to yourself if you should be self-inflicting the punishment of interest on yourself.
I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.
July 2nd, 2009 at 10:36 am |
Interesting post…..in Canada our rates are not as high as the US…used to collect for BOA several years ago with interest rates at 30-35%!
Ray´s last blog ..Investment Policy Statement- What is an Investment Policy?
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MyLifeROI Reply:
July 2nd, 2009 at 5:26 pm |
@Ray,
What is a typical rate over there? Credit cards are just insane in general, though.
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July 2nd, 2009 at 12:06 pm |
“CE (common error, often referred to as AD, after death)”
Assuming you were trying to be funny, that was clever.
Assuming you weren’t, you mean “common era” and “anno domini” (In the year of the lord).
Meg from FruWiki´s last blog ..Special:Log/delete
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MyLifeROI Reply:
July 2nd, 2009 at 5:29 pm |
@Meg from FruWiki,
Nope, there was not a joke in that statement.
I did laugh when I read that I put common error, though. Obviously, common era :) Must have gotten ahead of myself when typing, haha.
The AD… well, I have been living my life a lie. I have always thought of it as after death because I thought that logically followed BC since that is before Christ and all. You are right, my bad, and thank you for correcting me :)
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July 2nd, 2009 at 6:46 pm |
I am in the minority as I firmly believe there should be absolutely NO usury laws.
If a legitimate lender is willing to take a significant risk on a very questionable client, then why shouldn’t they be compensated for taking that risk? After all, if their client has proven themselves to be financially unreliable that lender potentially risks losing 100% of his stake, yes?
I know what you’re thinking…
“But, Len, what if everybody simply decided to charge outrageous interest?”
As I see it, one of two things would most likely happen: 1) very few people would bother to take out a loan in the first place; or 2) most of those that did would either skip town and never pay back the loan, or end up quickly defaulting on it anyway. Neither of which is a very good business model if you are a legitimate lender.
Now loan sharks, on the other hand, can get away to some extent with charging exorbitant interest because they use illegal means of persuasion to ensure they make a profit. A loan shark will send Vinnie to your house to break your kneecaps if you default — Bank of America will not. At least last I checked they didn’t. LOL!
I agree loan sharking is immoral and should always be illegal. But charging high interest in and of itself is not, IMO. It is simply a business decision. A poor one, I’m sure. But a business decision nevertheless.
Nice post, MLR! :-)
My $0.02 (after taxes)
Len
Len Penzo dot Com
Len Penzo´s last blog ..18 Things You Didn’t Know About The Federal Reserve System
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MyLifeROI Reply:
July 5th, 2009 at 10:48 pm |
@Len Penzo,
I, for the most part, agree. But for me that is theoretical.
In practice, unless you can guarantee that everyone is being educated to the point where they know they are making harmful decisions I don’t think it is ethical.
At a time where getting a high school education does not guarantee you have been given the minimal personal finance education, I just can’t imagine the repercussions of allowing companies to charge any interest. In fact, you can graduate college without ever having a class in personal finance in your entire life. And we will let companies prey on them? Not something I find ethical. And I am all for free enterprise… as long as their is a protection of the public.
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July 2nd, 2009 at 11:33 pm |
Hun, interesting history of usury. Personally, I think that usury laws do have the unintended side effect of making it harder for poor credit risks to get loans; when there’s a limit on the interest rates that can be offered, the only approach that the lender can take is to not loan money to poor credit risks. Whether that’s better or worse for those who have bad credit is an interesting debate.
Roger´s last blog ..Common Valuation Ratios
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MyLifeROI Reply:
July 5th, 2009 at 10:49 pm |
@Roger,
That would be an interesting debate, indeed.
I think payday loans have found a very profitable market in catering to the bad credit market. I don’t know if even they deny anyone… does anyone know for a fact?
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July 23rd, 2009 at 10:25 pm |
Credit cards are always a difficult subject. To me they’re much like smoking — No one should do it, but I have a tendency to let people be self-destructive if they so desire. I’d always rather we educate people on why they shouldn’t want debt, rather than prevent them from having it.
Brad´s last blog ..Why Everyone’s Wrong About Fixing Health Care
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May 3rd, 2010 at 8:38 pm |
Great info on your posts. Look forward to future updates, keep it coming! O.o
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