Usurious Contract: Everything You Need to Know
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.3 min read
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:
- Consumer loans usually allow a higher rate of interest than home mortgages.
- 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.
- Banks, consumer loan companies, and other businesses that deal in credit are subject to interest rate restrictions.
- 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:
- Forfeiture of the interest
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.
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:
- 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.
- That the price of RTOs is merely a byproduct of the cost of doing business in the RTO industry.
- 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:
- That the price of an RTO contract greatly exceeds the worth of the item being sold.
- That RTOs take advantage of the poor and poorly credited.
- 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.
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