Usury
Definition
Usury is the practice of charging an interest rate that exceeds the maximum rate permitted by state law. Usury laws protect borrowers from excessive interest charges on loans.
Example
State law caps consumer loan interest at 18%. A private lender offers a real estate loan at 24% interest. If this loan is not exempt from usury laws, the lender has committed usury and may face penalties including the borrower being required to pay only the principal with no interest.
Exam Tip
Know that usury involves charging interest above the legal maximum. Many real estate loans are EXEMPT from state usury laws due to federal preemption. The exam may ask which types of loans are subject to or exempt from usury limits. Private/hard money loans are more likely to face usury scrutiny.
Related Financing Terms
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Usury and other financing concepts.