What Is a Usury Example in Loans and How Does It Work?

Usury refers to lending money at excessively high interest rates, often beyond legal limits. These predatory practices can trap borrowers in cycles of debt, making repayment difficult. Many jurisdictions cap interest rates to protect consumers from financial exploitation.

Understanding how usury appears in different types of loans helps borrowers recognize and avoid unfair lending terms.

Personal Loan with Excessive Interest

Some lenders offer personal loans with interest rates far beyond reasonable borrowing costs, often targeting individuals with low credit scores or urgent financial needs. These loans may carry annual percentage rates (APRs) exceeding 100%, making repayment extremely difficult. While federal law caps interest rates for active-duty service members at 36% APR, consumer loan regulations vary by state, leading to significant differences in legal limits.

In states with weak usury laws or loopholes, lenders structure loans to bypass rate caps. Some classify high-interest personal loans as “installment loans” or “consumer finance loans” to avoid stricter regulations. In Texas, certain lenders use the Credit Services Organization (CSO) model, charging fees that push effective interest rates beyond 200%. Borrowers often make payments that primarily cover interest and fees rather than reducing the principal, trapping them in long-term debt.

Credit Card Account with High Penalty Rates

Many credit card issuers impose steep penalty interest rates when a borrower misses a payment or exceeds their credit limit. These default APRs can exceed 30%, significantly increasing the cost of carrying a balance. A single late payment can trigger these elevated rates, which may remain in effect for months or even years.

Under the Credit CARD Act of 2009, issuers must review penalty APRs every six months to determine if they should be lowered, but they are not required to reduce them. Some lenders apply these rates indefinitely, making it difficult for consumers to pay down their balances. Additionally, penalty APRs can be applied retroactively, meaning a borrower previously paying 18% interest could see their entire balance re-priced at 29.99% or higher.

Beyond interest rate hikes, issuers impose late fees that add to the financial burden. As of 2024, the Consumer Financial Protection Bureau (CFPB) has proposed lowering the maximum allowable late fee from $30-$41 to $8 for most credit cards, though legal challenges could delay or block the change. Even with lower fees, penalty APRs remain a major financial strain, as more of each payment goes toward interest rather than reducing the principal.

Small Business Funding Above Legal Limits

Small businesses often turn to alternative financing when traditional bank loans are unavailable, but some lenders exploit this need by offering funding arrangements that exceed legal interest rate limits. Merchant cash advances (MCAs) and revenue-based financing provide upfront capital in exchange for a percentage of future sales. While these options may seem flexible, their effective annualized costs can be extraordinarily high, sometimes exceeding state usury limits.

Some financing agreements structure repayment as a factor rate instead of an APR. A small business might receive $50,000 in funding with a 1.5x factor rate, meaning they must repay $75,000 regardless of how quickly they pay it back. When converted to an APR, this structure can result in borrowing costs far beyond legal thresholds. Courts have scrutinized such arrangements, with lawsuits arguing that disguised interest rates violate state lending laws.

Regulatory agencies have taken action against predatory small business lending. The Federal Trade Commission (FTC) has investigated misleading terms, while states like California and New York have introduced disclosure laws requiring lenders to provide clearer cost breakdowns. The New York Small Business Truth in Lending Act, for instance, mandates lenders disclose APRs and repayment terms, helping business owners make more informed decisions.

Title Loan Imposing Overly High Fees

Title loans, which require borrowers to use their vehicle as collateral, often come with excessive fees that significantly increase the total repayment amount. Lenders frequently impose charges such as lien fees, origination fees, and processing fees that inflate costs beyond what many borrowers anticipate. These fees are often non-refundable and must be paid upfront or rolled into the loan, making them a substantial financial burden.

Some states cap title loan fees or require more transparent disclosures, but loopholes allow lenders to structure costs in ways that bypass these protections. In states with strict interest rate caps, title loan providers may classify additional charges as “service fees” rather than finance charges, ensuring they remain legally permissible while still driving up the borrower’s total repayment obligation. These fees can also compound if a borrower renews or refinances their loan, extending repayment terms while adding new costs with each renewal.

Payday Loan with Escalating Charges

Short-term payday loans often appear as a quick solution for those in urgent need of cash, but their structure frequently leads to escalating costs that make repayment difficult. These loans typically require full repayment within two weeks, often coinciding with the borrower’s next paycheck. When borrowers cannot afford to pay the full amount, they may be offered a rollover or renewal, which extends the loan term but adds new fees and interest. This cycle can result in borrowers paying far more in fees than the original loan amount.

Many states have attempted to curb payday loan abuses by implementing interest rate caps or limiting rollovers. Colorado, for example, restricts payday loan interest rates to 36% APR and requires loans to have a minimum six-month repayment term, reducing the likelihood of borrowers falling into a debt trap. In contrast, states without strong regulations allow lenders to charge triple-digit APRs, with some payday loans reaching effective rates of 400% or more. The Consumer Financial Protection Bureau (CFPB) has introduced rules requiring lenders to assess a borrower’s ability to repay before issuing a loan, but enforcement varies. Some lenders circumvent these protections by operating online or through tribal affiliations that claim exemption from state laws.