Usury Laws And Car Loans: What You Need To Know

Usury laws are interest rate laws that prevent lenders from charging exorbitantly high rates on loans. In the United States, individual states are responsible for setting these laws, which can vary significantly from state to state. For example, Pennsylvania considers interest above 25% as criminal usury, while New Jersey's general usury limit is 30% for individuals and 50% for corporations. These laws are designed to protect consumers from predatory lending practices and high-interest rates, particularly those with low incomes, poor credit, or no credit history, who are vulnerable to exploitation.

When it comes to car loans, the interest rate is a critical factor in determining the monthly payment amount and, ultimately, the total cost of the vehicle. While usury laws regulate the maximum interest rate that lenders can charge, there are exceptions. For instance, nationally chartered banks are often exempt from state usury laws, and each state may have different rules for different types of sales.

In the context of car loans, usury refers to charging interest rates on loans that exceed the maximum permitted by law. This practice can have severe financial consequences for borrowers, especially when they are unaware of the caps on allowable interest rates or have no other choice but to accept the terms offered by carmaker-affiliated lenders.

How do usury laws work?

Usury laws are interest rate laws that prevent lenders from charging excessively high rates on loans. These laws are enforced at the state level in the United States, with individual states setting their own usury laws. This means that interest rate limitations can vary from state to state. For example, Pennsylvania considers interest above 25% as criminal usury, while New Jersey's general usury limit is 30% for individuals and 50% for corporations.

Usury laws set a limit on the amount of interest that can be charged on a variety of loans, including consumer loans, credit card debt, and retail installment contracts. In Washington State, for instance, the usury law sets a maximum interest rate of 12% per year for consumer loans that are not related to credit card debt or retail installment contracts.

The first usury laws in the United States were adopted by 18th-century American colonies, which set the interest rate cap at 8%. Over time, states have updated and adjusted their usury laws to accommodate different types of lenders and loans.

While there is no federal law that sets a maximum interest rate on all consumer loans, the Military Lending Act is a federal law that requires loans made to active-duty military members or their dependents to be capped at a 36% APR.

Usury laws protect consumers from predatory lending and unreasonably high-interest rates. These laws help prevent financial institutions from taking advantage of borrowers by charging excessive interest rates.

What are the interest rates on car loans?

Interest rates on car loans vary depending on several factors, including credit score, loan term, vehicle type, and state laws. Lenders offer lower interest rates to borrowers with higher credit scores, as they pose less risk of defaulting on the loan. According to Experian, the average auto loan interest rate in the first quarter of 2024 was 6.73% for new vehicles and 11.91% for used vehicles. However, these rates can range from 5.25% to 15.77% for new cars and 7.13% to 21.55% for used cars, depending on the borrower's credit profile.

Credit scores play a significant role in determining interest rates. Borrowers with excellent credit scores may qualify for rates below 5% on new car loans, while those with scores below 500 may receive rates of 20% or higher. Lenders also consider other aspects of the borrower's credit history, such as payment history, length of credit history, and debt-to-income ratio.

The loan term also impacts the interest rate, with shorter-term loans typically having lower interest rates than longer-term loans. Additionally, the type of vehicle being financed can affect the interest rate, with newer vehicles often qualifying for lower rates.

State laws and market rates can also influence car loan interest rates. Different states have varying monetary policies and tax requirements, which can drive up the Annual Percentage Rate (APR). Market rates are a significant factor, as lenders adjust their rates based on their borrowing costs. When the Federal Reserve raises or lowers its target interest rate, auto lenders tend to follow suit.

It is worth noting that usury laws, which set maximum interest rates to protect consumers from predatory lending, are enforced at the state level in the United States. These laws vary by state, and some states, like Nevada, have no usury limits. Therefore, when considering a car loan, it is essential to understand the applicable state laws and how they may impact the interest rate offered by lenders.

How do I compare car loans?

When comparing car loan offers, it's important to look beyond the monthly payment and consider several options to find the one that's best for you. Here are some key factors to help you compare car loans:

• Annual Percentage Rate (APR) and Interest Rate: The APR and interest rate are crucial factors in understanding the total cost of your loan. The interest rate is the percentage charged on the outstanding balance of the loan, which is added to your monthly repayments. The APR includes both the interest rate and any additional fees charged by the lender. By comparing the APR, you can get a more accurate picture of the overall cost of the loan.
• Length of the Loan: The length of the loan, or loan term, refers to the number of years you have to repay it. Longer loan terms result in smaller monthly payments but higher overall interest costs. Financial experts generally recommend an auto loan term of five years or less to minimise interest expenses and avoid owing more than the vehicle is worth.
• Total Amount Financed: Consider the total cost of ownership, including taxes, insurance, registration fees, maintenance, gas, and repairs. These additional costs can vary depending on whether you're purchasing a new or used vehicle.
• Fees: Car loans may come with various fees, such as sign-up or application fees, late payment fees, extra repayment fees, break/exit fees, and ongoing or monthly fees. Be sure to factor in these costs when comparing loans, as they can add up over the life of the loan.
• Fixed vs. Variable Interest Rates: Car loans may have fixed or variable interest rates. Fixed-rate loans maintain the same interest rate throughout the loan term, providing stability and predictability. Variable-rate loans, on the other hand, can fluctuate, leading to potential increases or decreases in your interest repayments.
• Secured vs. Unsecured Loans: Car loans are often secured loans, meaning an asset (usually the car itself) is used as collateral. If you default on a secured loan, the lender can repossess the asset. Unsecured loans don't require collateral but typically come with higher interest rates as they are perceived as riskier by lenders.
• Lender Reputation and Customer Experience: Research the reputation and customer reviews of the lender. Look for transparency in their loan terms and conditions, responsiveness to customer inquiries, and flexibility in managing repayments.

By considering these factors and comparing multiple loan offers, you can make a more informed decision about which car loan best suits your financial needs and goals.

What are the penalties for usury?

Usury laws are enforced by individual US states rather than at a federal level, and so the penalties for usury vary. In general, usury is a crime but can also be a violation. If a creditor charges a rate higher than the maximum rate allowed by law, they are breaking the law and can be held accountable for violating usury laws.

Penalties for usury can include the lender having to return all interest to the borrower, most often with additional fees added on. These fees usually amount to more than the interest the creditor would have received. Violators may also be subject to jail time.

In Texas, for example, a creditor who contracts for, charges, or receives interest that is greater than the amount authorised by law in connection with a transaction for personal, family, or household use is liable to the obligor for an amount that is equal to the greater of:

• Three times the amount computed by subtracting the amount of interest allowed by law from the total amount of interest contracted for, charged, or received; or
• $2,000 or 20% of the amount of the principal, whichever is less.

In addition, a creditor who charges and receives interest that is greater than twice the amount authorised is liable to the obligor for the principal amount on which the interest is charged and received, as well as the interest and all other amounts charged and received.

In Pennsylvania, interest above 25% is considered criminal usury.

What are the exceptions to usury laws?

Usury laws are enforced by individual states rather than at a federal level, and they vary between states. These laws are designed to prevent lenders from charging unreasonably high interest rates on loans. While the specifics differ between states, here are some common exceptions to usury laws:

• Commercial, Agricultural, Investment, and Business Loans: In Washington state, if a loan is made primarily for commercial, agricultural, investment, or business purposes, the borrower cannot claim a defence of usury against the lender. Interest rates on these loans may exceed the state's usury law.
• Credit Card and Retail Installment Debts: Credit card debts and other retail installment debts frequently exceed the maximum interest rate allowed by law. This is because, in many states, usury laws do not apply to "retail installment transactions."
• Consumer Leasing: In Washington, if a consumer lease on personal property exceeds four months and the value of the property is up to $25,000, the borrower cannot claim usury as a defence.
• Most Favoured Lender Status: National banking associations, such as Wells Fargo and Bank of America, can charge interest on consumer debt at the highest rate available to any institution in the US or its territories.
• First Lien Residential Mortgage Loans: Federal law generally takes precedence over state usury laws for most first lien mortgage loans. However, private lenders or sellers who make isolated transactions are typically subject to state usury laws.
• Second Mortgages and Home Equity Loans: In Washington, consumer loan companies can offer second mortgages and subordinate lien home equity loans on residential real estate at interest rates that exceed the state's usury law.
• Small Loans: In Washington, licensed check cashers or check sellers with a "small loan endorsement" can offer "small loans" (usually payday loans) with interest rates that exceed the maximum rate under the state's usury law.
• Lease-Purchases on Personal Property: In Washington, lease-purchase agreements on personal property are exempt from the state's usury law.
• Loans from a Tax-Qualified Retirement Plan: In Washington, usury laws do not apply to loans permitted under applicable federal law and regulations from a tax-qualified retirement plan to a participant or beneficiary under the plan.
• Interest, Penalties, and Costs on Delinquent Property Taxes: In Washington, the state's usury law does not apply to interest, penalties, or costs on delinquent property taxes.
• Deferred Payment of Purchase Price: In Washington, sales contracts for goods or services that provide for the deferred payment of the purchase price are exempt from the state's usury law.
• Exemptions for Banks and Financial Institutions: Usury laws often do not apply to most lending institutions, such as banks, credit unions, finance companies, and pawn brokers.
• Exemptions for Licensed Real Estate Brokers: In California, usury laws do not apply to licensed real estate brokers if the loan is secured by real estate.
• Exemptions for High-Value Loans and Borrowers: California provides exemptions from usury laws for loans exceeding $300,000 or borrowers with assets of at least $2,000,000. These exemptions have specific conditions, such as the borrower not being an individual and the loan not being for personal, family, or household purposes.
• Exemptions for Licensed Individuals and Entities: California's usury laws also provide exemptions for licensed individuals and entities, such as securities broker-dealers, banks, savings and loan associations, credit unions, and insurance companies.

Frequently asked questions