What is usury in real estate: What you MUST know!

If you’re into real estate, or planning to buy a property, you must know what is usury in real estate. The last thing you’d want is your loan lender charging you ridiculously high interest rates. 

So, what is usury in real estate? 

Usury happens when a lender charges more interest than what’s legally allowed. While it’s normal to charge interest when lending money, there are laws to prevent what’s called “usurious” interest. These usury laws ensure that interest rates don’t reach levels that could be considered predatory lending practices. The laws apply to loans backed by real property, like mortgages. Both borrowers and lenders need to know what the usury limits are in their state. And, make sure everything’s above board. 

For example, Delaware and South Dakota have lenient rules on interest rates. Nevada takes it a step further by having no usury limits at all. On the other hand, Pennsylvania treats interest rates above 25% as criminal usury rates. In New Jersey, the general usury limit is 30% for individuals and 50% for corporations.

How do usury laws protect a borrower?

In the U.S., usury laws vary from state to state. Each state has its own rules about how much interest can be charged on a loan. This includes real estate loans, personal loans, private student loans, and even credit cards. These state usury laws dictate the maximum interest rate that can be charged. Keep in mind that the penalties for violating them can be pretty serious. These usury laws apply by setting a cap on the maximum interest rate a lender can charge. They protect borrowers from getting trapped in loans with unreasonably high interest rates that could cause financial stress. This is especially important with big, long-term loans such as home mortgages.

Sometimes, federal laws can override state usury laws. For example, the Supreme Court has ruled that banks can follow the usury laws of the state where they are. Even if, they’re lending to someone in a state with lower limits. The downside is that this can create differences in lending practices across the country.

What are some tricks that deceitful lenders may employ? 

Some predatory lenders try to get around these laws by hiding charges in the loan terms or tacking on excessive fees. But these shady practices are illegal and come with serious consequences. Borrowers should always double-check their loan agreements and consult a real estate attorney if something seems off.

Some examples of usury by loan lenders include:

• Over-the-top mortgage rates: A lender offers a mortgage loan with an interest rate way above the state’s legal limit, often targeting borrowers who are desperate or not well-informed.
• Hidden charges: A lender sneaks in extra fees, effectively pushing the interest rate beyond what’s allowed without the borrower realizing it.
• Credit cards and advances: Even though it’s not directly related to buying a house, credit card rates and cash advances can also get into usurious territory. Especially, if they’re used for real estate investments.

How do lenders avoid usury issues?

The easiest way to avoid usury issues is to ensure the interest rate, including fees, stays below the legal limit. Or, to structure the loan so it qualifies for an exception. Another approach is to use a different state’s law to govern the loan. For example, if a property is in California and none of the usury exceptions apply, the rate would be capped at 10%. However, if the borrower lives in California and the lender operates out of Connecticut, the lender could use Connecticut law for the loan (except for the deed of trust securing the property). Since Connecticut has broader exceptions to usury, this could help the lender bypass California’s limits.

What are the penalties for breaking usury laws?

If a lender violates usury laws, they can face hefty fines, be required to pay back the borrower, or even face criminal charges. The severity of these penalties depends on how bad the violation is. It also depends on the specific laws of the state where the loan was made.

Key takeaway

Understanding what is usury in real estate, and how to protect oneself from it, is important for anyone involved in property transactions. There are usury laws that protect against lenders charging excessive interest rates on loans and predatory lending by implementing interest rate ceilings. Since the laws can be different from state to state and sometimes complex, it’s smart to get legal advice and read loan terms carefully. This way, borrowers can ensure they’re getting fair loan terms, and lenders can avoid the legal risks of charging usurious interest.

Staying informed about lending practices subject to usury laws helps everyone make better financial choices and promotes fair play in the lending world.

Written by Ramona Sinha. September 22, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.