Key Takeaways

  • A usurious contract involves charging interest above legal limits and can be voided or penalized under state law.
  • Interest rate caps vary by state and loan type, with civil and criminal penalties for violations.
  • Corporations may be exempt from usury laws in some states due to assumed bargaining power.
  • Courts can reform usurious contracts to comply with legal limits rather than voiding them.
  • Rent-to-own (RTO) agreements often face scrutiny under usury laws due to high effective interest rates.
  • States like New York and Maryland have strict usury statutes, while others offer broader lender protections.
  • Consumers should be cautious of loan structuring tricks designed to circumvent usury laws.

A usurious contract is an agreement between two parties in which there is a higher interest rate on a loan than is permitted by the law. The maximum amount of interest that can be charged before it is considered usurious is determined by the states, and this usually varies depending on the type of loan or the parties involved. For example:

  1. Consumer loans usually allow a higher rate of interest than home mortgages.
  2. Interest rates for corporations are not restricted in some states, this being done under the premise that corporations have the business sense and bargaining power to independently negotiate a fair rate.
  3. Banks, consumer loan companies, and other businesses that deal in credit are subject to interest rate restrictions.
  4. Personal loans involving private individuals are regulated by the state’s usury laws.

In many states, the interest rate limit is between 8 percent and 12 percent, although it can go as low as 5 percent in some states, and others have no upper limit. Those who exceed these limits may be subject to such penalties as:

  1. Fines
  2. Forfeiture of the interest
  3. Prison

The last of which is most likely to occur if loan sharking is being perpetrated, which involves loaning money, charging usurious interest on it, and then threatening extortion. Loan sharking has been a traditional revenue stream for organized crime, preying on those who lack the good credit to qualify with a commercial lender for a loan. Loan sharking is considered a felony in many jurisdictions.

In regard to consumer credit cases, courts may choose to modify usurious contracts so that the borrower only has to pay the legal amount of interest. The Uniform Consumer Credit Code (UCCC) also provides some manner of consumer protection. It was written with the goal of clarifying, simplifying, and updating consumer credit and usury legislation, as well as setting ceilings for interest rates. Although only nine states have adopted it in full, select provisions have been included in the consumer credit laws of most states.

Rent-to-Own Contracts

One kind of contract that is particularly prone to accusations of usury is the rent-to-own (RTO) contract. Rent-to-own contracts are contracts that allow consumers to rent a product for a week or a month at a time. At the end of the rental period, the consumer can either terminate the contract or renew it by making another rental payment. If the consumer renews the contract enough times—usually, over an 18-month period—and all other agreement terms are met, the consumer will then take ownership of the item they have been renting.

Rent-to-own contracts are typically encountered with the purchasing of furniture, televisions, appliances, and assorted home electronic goods. Advocates of RTO contracts claim, among other things:

  1. That RTOs provide the means for consumers to own items they would not be able to own otherwise due to bad credit or poor finances.
  2. That the price of RTOs is merely a byproduct of the cost of doing business in the RTO industry.
  3. That if the rates are disclosed, consumers should be allowed the choice of how they purchase their product.

While in counterpoint, critics of RTO contracts argue:

  1. That the price of an RTO contract greatly exceeds the worth of the item being sold.
  2. That RTOs take advantage of the poor and poorly credited.
  3. That were RTO rates not classified as leases, they would be in violation of state usury laws due to their excessive amounts.

For many years, the legal status of such contracts has been debated, with over forty states adopting some manner of RTO-related legislation. In most states, RTO businesses are required to adhere to disclosure requirements concerning their contracts, yet in many cases, they can still charge rates in excess of what the state would consider usury in other circumstances.

However, some courts have ruled that these excess rates are usurious and thus, illegal. Some states have also passed strong consumer protection laws, such as Minnesota, where the Rental Purchase Agreement Act (RPAA) provides consumer protections related to RTO loan default, information disclosure, and collection fees.

That said, the state of usury in RTO contracts is an area of consumer law that is still far from settled.

State Usury Laws and Contract Validity

Usury laws are governed by individual states and significantly influence whether a contract is enforceable. For instance, New York's General Obligations Law § 5-511 renders any usurious contract void—regardless of whether the borrower agreed to its terms. In contrast, states like Maryland cap simple interest rates at 6% per year for most loans but allow certain fees or structuring tactics that may blur the line between legal and illegal interest.

Some states distinguish between civil usury (typically penalized by forfeiture of interest) and criminal usury, which can result in felony charges and imprisonment if the interest exceeds a statutory limit—commonly around 25% annually.

Courts can strike down usurious agreements entirely or revise them so that borrowers pay only the lawful interest. However, lenders who intentionally structure loans to avoid detection—such as by misclassifying the loan or layering hidden fees—risk severe legal consequences if uncovered.

Corporate Borrowers and Usury Law Exemptions

In many jurisdictions, corporate or commercial borrowers are not afforded the same usury protections as individuals. The assumption is that businesses possess the financial acumen and bargaining power to negotiate fair loan terms. However, this exception can be exploited by lenders who push individuals to borrow under corporate entities or shell companies.

States vary in how broadly these exemptions are applied. In New York, for instance, the usury cap does not apply to loans over $2.5 million, effectively exempting many large business loans. Still, courts may scrutinize arrangements where the corporate structure is used as a façade to evade consumer lending regulations.

Common Usury Evasion Tactics

Lenders seeking to bypass usury laws may use several questionable practices, including:

  • Reclassifying loans as leases or installment sales
  • Embedding excessive fees instead of upfront interest
  • Structuring repayment schedules to obscure effective annual rates
  • Choosing governing law from states with weak usury restrictions

While some tactics may be technically legal, they can be challenged if deemed deceptive or unconscionable. Courts increasingly look at the effective rate of interest, not just the stated rate, when determining whether a contract is usurious.

Federal Oversight and the UCCC

The Uniform Consumer Credit Code (UCCC) was developed to provide a consistent framework for regulating consumer credit and limiting excessive interest rates. Though only a few states—such as Colorado and Utah—have adopted it fully, many others incorporate its provisions into their consumer protection statutes.

The UCCC seeks to balance creditor rights with borrower protections by capping interest rates and requiring transparent disclosures. However, enforcement is uneven, and the lack of nationwide adoption limits its overall impact.

Frequently Asked Questions

1. What makes a contract usurious?

A contract becomes usurious when it charges interest beyond what is legally allowed by state law, often resulting in penalties or being declared void.

2. Can corporations be protected under usury laws?

In many states, corporations are exempt from usury protections because they are presumed to have equal bargaining power and access to legal counsel.

3. Are all high-interest loans illegal?

Not necessarily. If the loan complies with state interest rate caps or qualifies for exemptions (e.g., large commercial loans), it may be legal despite high interest.

4. What happens if a court finds a loan usurious?

The court may void the contract, require repayment of excess interest, or reform the terms to comply with legal limits.

5. How can I avoid entering into a usurious contract?

Review interest rates carefully, understand applicable state laws, and consult an attorney before signing any high-interest loan agreement.

If you need help understanding what a usurious contract is, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.