Home > Personal Finance > Could Your High Interest Rate Be Illegal?

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When you apply for a car loan, a credit card or a mortgage you know you’re going to have to pay interest. The question is how much you’re willing to pay in interest to borrow that money: 5%? 20%? What if you were asked to pay 300% interest?

The morality of high interest rates has been in the news recently, with Pope Francis condemning the practice as a “scourge.” During a weekly general audience, the Pope said, “When a family has nothing to eat, because it has to make payments to usurers, this is not Christian, it is not human!”

Usury — its definition, legality and even morality — has been debated for centuries. At various points in history, religious and governmental leaders have spoken out against it or argued about the types of activities it encompasses. In some cases, lending money and charging any interest at all is considered usurious. In other cases, usury refers to charging excessive interest.

Perhaps this definition from William Blackstone’s Commentaries on the Laws of England best captures the debate:

When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.

In the U.S. today, the term usury generally refers to lending money at interest rates that exceed state law. And, yes, it apparently still exists.

New York Attorney General Eric T. Schneiderman, for example, recently cracked down on several out-of-state lenders who allegedly violated New York’s usury law by charging residents interest rates ranging from 89% to more than 355%.

While states can and sometimes do cap interest rates that can be charged for certain types of loans, they can’t stop out-of-state national banks from selling higher-rate products to their citizens. Not to mention the fact that many states have repealed usury laws or raised interest rate limits for lenders within their borders.

In addition, 38 states have laws allowing small short-term loans, known as payday loans, according to the National Conference on State Legislatures. Some cap rates, but others don’t. As a result, rates on these loans can be very high — 300% to 1,000% or even more. There are efforts in some states to limit the rates on these loans to something more affordable to borrowers.

And then there is the issue of fees. In some cases, interest rates are capped but fees are not. In others, state law may restrict fees to a reasonable level, but when coupled with interest, the cost to the consumers is effectively much higher.

Lenders argue that they need to charge high rates to account for the risk they take when making these loans to borrowers with limited credit histories or bad credit.

To borrowers, of course, it’s all the same whether it’s called interest or fees, and whether it’s defined as usury or not. It’s still more money they have to earn in order to pay back the lender.

And to the Pope, it’s sinful. What do you think?

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  • For the Love of God

    I do not have a problem with paying extra for money
    borrowed, people, companies, whatever, should make money, especially to cover
    costs required for billing, clerical, etcetera.

    Where I have a problem is in the high interest rates that go
    above 10 -or at most- 15%, as that is where a problem can begin with lower
    income people.

    Business is a risk, always has been, always will be, and
    lenders, credit companies, banks, etcetera, are the only ones who have made
    themselves risk free.

    These companies that loan money have made it where not only
    do they make the money back on the item/s purchased (even for mortgages),they
    double their money back and triple their money back just in interest, now let’s
    all the exuberant fees they charge, oh ya, they are not hurting. They want you
    to think they are, and if they do find themselves in trouble, it isn’t caused
    by the consumer, it’s from their own mismanagement, bad investments, all the
    same things they accuse the consumer does, but at least they have our
    government and our tax dollars to bail them out, consumers don’t have that
    luxury when they mess up.

    Nope, the money lenders are given carte blanche and are free
    to take advantage of and devastate that consumer even more.

    It is also sad that these companies cater to people who make
    big money.

    My daughter worked for a bank where she was a loan officer
    and made manager of the loan department. She constantly complained to me about
    the disparity shown to lower income people over the higher income people.

    She said that in actuality, the higher income people
    defaulted far more and were constantly late, yet the bank bent over backwards
    for them, lowering their interest rates, removing fees and late charges.

    When it came to the lower income people who were far more
    conscientious, courteous, etcetera, rarely, if ever, got the breaks the higher
    income people got. Can also attest this to be true from when I was in sales and
    when credit was used.

    Numerous times, credit would be given to the persons whose
    income was higher, but had bad credit, or even bankruptcy. Yet when a lower income person applied with
    mediocre credit (not near as bad as the higher income ones), they were either
    denied, or given much higher interest rates.

    To me, lenders know what they are doing; they know they will
    make more off the struggling lower income people over time, even if they
    default.

    The lenders also, and in my opinion, have committed a crime,
    as they have put these people into a situation they Know they will fail at, and
    all because they just wanted to have a home for their family, or have a nice
    bed to sleep on, or a stove to cook on, or fridge to keep food safe to eat.

    It is the same when these companies set up shop at colleges,
    giving cards to just about all who wants one, knowing these kids would likely
    not get the good paying job they hoped for or not even one right away.

    These companies also know these kids will be extremely
    tempted to use the card to live on, pay living expenses, and buy food,
    etcetera.

    To me, when they go after people they know will have some
    issues, proves what leeches they really are.

    A much more fair way to do business is to charge a flat
    rate, calculated with the item purchased and calculated with a payment that can
    be paid off in a reasonable time. The companies can still charge late fees, and
    if someone goes into complete default, charge the reasonable fees required to
    get their money.

    Have to add though, they and the consumer need to first work
    together to come up with a plan to pay back the borrowed money, if neither
    party does this, for instance, the lender refuses to work with the client, they
    cannot charge extra to the client, and if the client does not call or try to
    work with the lender, they can be charged the extra fees.

    Have to say too, that I love how the consumer is always the
    bad guy that they should know what they can or cannot afford. Though I do agree
    consumers should, have to disagree that these companies are free of fault.

    Why would you one; not make sure exactly what the consumer
    can actually afford? Second; why too then, would you also give them a credit
    limit -and knowing human nature- above their possible means?

    As I said in the beginning, life is not something we can set
    a clock to or even “Bank” (pun intended) on.

    Life happens, we lose jobs, have major health problems that
    can devastate us, get divorced, so many different life unexpected casualties
    that throws a whammy into our lives and finances that can and does happen.

    But to allow these companies to keep adding excessive fees
    and charges to these once middle class and even lower middle class people so
    they can be the only ones guaranteed their money, pad their pockets, and
    contribute to nail that final nail into the coffins of these hardworking
    people, is criminal.

    The majority of these people are not deadbeats you can’t
    count on. In the majority of cases, you will find that some major unexpected
    life situation happened to cause them to get behind, the rest yes, they exceed
    their own financial limit.

    Sometimes, that major problem could even be an unexpected
    major expense like with the vehicle they need to get to work with. Even with
    proper maintenance of your vehicle, sometimes, something goes wrong you never
    thought would happen, and it’s usually not a cheap repair.

    It should be a crime for these companies to willingly put
    people into a debt. It should be a crime to place the blame solely on the
    consumer. It should be a crime to charge daily interest. It should be a crime
    to be allowed to basically legally rob and destroy people’s lives, especially
    when all they are trying to do, is improve the quality of their lives.

    The average Joe blow, is made to actually feel like a loser,
    that they are replaceable, and if all goes wrong for you, it’s All your own
    doing, not that the company you have worked for years, all of a sudden replaces
    you because they don’t want you to get retirement. It’s the consumer’s fault
    they got sick, cancer, whatever, and lose their job or can’t pay their bills,
    or numerous other examples of life situations I can give

    Now I do agree, it is a choice we all make when we sign on
    the line. However, it is also a choice from the company to decide if they want
    to give the credit, and whether they want to really stick it to this person who
    just wants to improve their lives or their families, and then enjoy watching
    your greatest entertainment of these people/families slowly destroyed.

    Anyway, just my opinion.

  • Jake

    These conversations are always funny to me. This is a product of a worthless American education system. If high school students leaned simple supply and demand and interest rates this would not be a conversation. Any Econ 101 student from a no name school will tell you, FREE MARKETS!!!!! Yes it’s a crazy thought but let’s actually use this prospective. So high interest rate companies compete against eachother just like. Any other good or service. The question is are they fixing prices? Are they colluding? No they aren’t if one of them could charge half the interest and take the others out of business they would do it in a heart beat. The fact is that the interst rate is at market equiblium if there are informed buyers. In reality why are these services needed? Well not everyone is born with money or family to borrow from when they are broke. Some people screw up there credit. What should these people do? Go homeless? banks will not give these people loans. So where do they go… Other lending institutions. let’s always talk about risk, the more risk is involved the higher you would expect your return as an investor. How is this different? If anyone has any question for me cause they are to socialist to understand I’ll be happy to give you my phone number and address so you can be straighten out by an American capitalist. Freedom !!!!!

    • Rational

      Jake, your education seems even worse than America’s, but it’s nice to see you did a class on basic econ.

      You realise human beings are led by emotions, not supply and demand principles, right? Your system, and all utopian economic systems, are based on rational decision making. And if our decision making was fully rational, we’d have little need for a utopian ideology like free markets.

      Secondly, you are talking about absolute free markets, where all buyers are fully informed and fully accessible to all services. You are also assuming there are no barriers to competition. You are assuming that consumers cannot be misled, misinformed or manipulated, and that individuals cannot be placed in situations open to manipulation.

      What about drug addicts? What about dependents? What about the desperately poor? What about those who don’t have full knowledge of the markets? You said it yourself, ” The fact is that the interst rate is at market equiblium if there are informed buyers”. Well, many buyers aren’t informed, or are misled.

  • Miguel Serrano

    how about not getting credit? i know somethings are needed but to get credit on phones or things that are needed is ridicules. credit is what cause our economy to crash. credit is what is making rich people charge high prices on their products.. stop buying $800 phones with credit or at all and you will see apple sell their phones at $200.. credit is making things cost more because its makes thing affordable in a way but all it does is make other people rich by charging interest and the other rich guy for marking up his product because the uneducated will always buy it

  • hate corp

    America always has been the land of the greed (Corp Greed) its sad.

  • Sharla Valeski

    I bought a pair of chairs from west elm and decided to opt for the plan where I defer paying interest for a year. Then I forgot about it and didn’t really pay attention to my statements. I was paying way above the min payment on my [redacted] and thought I was doing well. So, a year passed and just this last month, I got hit with an accrued interest of $375.22 for a pair of chairs that cost $1505.63. In Feb 2015, my total balance on the card was $3197.83. I’ve paid $2509.79 in payments over the past year (made an additional purchase of $765.59) but it looks like they applied very little of that to the chair purchase. How can I resolve this. I am able to pay the cc balance in full but not sure I want to pay what [redacted] says I owe.

    • Jeanine Skowronski

      Hi,

      After the minimum is met, the payment should go to the balance with the highest APR.

      Best,

      Jeanine

  • Shon Williams

    If I pawned my car title for 800 and I chose to pay the most monthly payments 259.00 and I’ve been paying this for 11 months at a total of 2,500 already payed on time every month something just don’t seem right to me what y’all think.

  • arielle anderson

    i have a flex loan with advance financial and i realized i am paying 259% interest every time i make a payment i am paying the interest and not the loan. big mistake

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