Lenders can’t charge just any interest rate because specific standards bind them under usury laws. This law has always had a long history of protecting borrowers from exorbitant interest rates on loans. So lenders ought to understand the basics. Else, they will be caught in its complexity and steep penalties for violating usury laws.

Every lender must know that there is no federal limit on interest rates. The maximum interest rates are set up by the state hence the variations. Due to its variation, lenders often use the state-by-state variation in usury standards to their advantage. For example, some lenders set the interest rate to where their financial institution is rather than where the borrower is. Hence, the loan contract should clearly state the state’s usury laws implemented in the agreement.

In addition, the state usury laws can be quite complex because it is dependent on the loan amount, credit type, and issuer. This law subjects creditors to stiff penalties for violating usury laws. Some of the penalties are the following:

  • Recovery of a multiple of the usurious interest paid,
  • Elimination of the borrower’s obligation to pay interest in the future,
  • Or even jail time in some cases.

Also, lenders can not plead ignorance because it is expected that lenders have prior knowledge of the law. As a result, lenders must try to understand how the law works in their state regardless of how complex the law might be.

To know more about Usury law, its violation, and penalty, click here.


About Note Servicing Center

Note Servicing Center provides professional, fully compliant loan servicing for private mortgage investors so they can avoid the aggravation of servicing their own loans and just relax and get paid.

Contact us today for more information.