Usury Laws by State

Introduction to Usury Laws

Usury laws are state and federal regulations that set the maximum interest rate a lender can legally charge on a loan. These laws have existed in some form for thousands of years, rooted in the fundamental principle that borrowers should be protected from exploitative lending practices. In the United States, usury laws vary dramatically from state to state, creating a patchwork of regulations that anyone involved in lending, borrowing, or buying and selling mortgage notes must understand.

For note holders, real estate investors, and anyone involved in seller financing, usury laws are not an abstract legal concept. They directly impact the interest rates you can charge, the enforceability of your notes, and the marketability of your paper on the secondary market. A note that violates usury laws can be rendered partially or entirely void, resulting in severe financial penalties for the lender.

This comprehensive guide covers usury laws across all 50 states, explains how they interact with seller-financed mortgage notes, and provides the practical knowledge you need to structure compliant transactions. Whether you are creating a new seller-financed note or looking to sell an existing mortgage note, understanding these laws is essential to protecting your investment.

Understanding Usury: Key Concepts

Before diving into the state-by-state breakdown, it is important to understand the key terminology and concepts that govern usury law in the United States.

General Usury Rate (Legal Rate)

The general usury rate is the default maximum interest rate that applies to most consumer loans when no specific exemption applies. This is the baseline ceiling. If a lender charges more than this rate on a covered transaction, the loan may be considered usurious. In many states, this rate applies when no written agreement specifies a different rate, or when the transaction type does not qualify for a higher cap.

Contract Rate

The contract rate is the maximum interest rate that parties can agree to in a written agreement. In most states, the contract rate is higher than the general usury rate, reflecting the legal principle that sophisticated parties should have the freedom to negotiate terms. Some states set a specific percentage, while others tie the contract rate to a variable benchmark such as the Federal Reserve discount rate or Treasury bill yields.

Judgment Rate

The judgment rate is the interest rate that accrues on court-ordered judgments. When a court awards damages or a debt collection judgment, the unpaid amount accrues interest at this rate until paid. Judgment rates vary widely by state and may be fixed by statute or tied to the original contract rate.

Criminal vs. Civil Usury

Most states treat usury as a civil matter, meaning the penalties are financial rather than criminal. The lender may forfeit the excess interest, lose the right to collect any interest, or in some states forfeit the entire principal. However, several states also have criminal usury statutes that can result in felony charges when interest rates exceed a certain threshold. New York, for example, sets civil usury at 16% and criminal usury at 25%.

Exemptions

Nearly every state exempts certain types of transactions from usury limits. Common exemptions include:

• Federally chartered banks and credit unions (preempted by federal law)
• Commercial and business loans (many states exempt loans above a certain dollar threshold)
• Mortgage loans originated by licensed lenders
• Corporate borrowers (several states exempt corporations entirely)
• Seller-financed transactions (some states provide specific exemptions)

State-by-State Usury Laws

The following table provides a comprehensive overview of usury laws across all 50 states. Rates are current as of 2026, but because some states tie their limits to variable benchmarks (such as the Federal Reserve discount rate or Treasury bill yields), the effective maximum rate in those states may fluctuate. Always verify the current rate with the applicable state statute before structuring a transaction.

Important: This table provides general guidance. Many states have complex exemptions based on loan amount, borrower type (individual vs. corporation), loan purpose (consumer vs. commercial), and lender licensing status. Some states tie their rates to variable benchmarks that fluctuate over time. Always consult the specific state statute and, when appropriate, qualified legal counsel before structuring a loan or seller-financed transaction.

How Usury Laws Affect Seller-Financed Notes

Usury laws have a direct and significant impact on anyone who creates or holds a seller-financed mortgage note. When a property seller provides financing to the buyer, the seller becomes the lender and is subject to the usury laws of the state where the property is located. Understanding these laws is critical to structuring a note that is both enforceable and marketable on the secondary market.

Seller Financing Exemptions

Some states provide specific exemptions for seller-financed transactions, particularly when the seller is financing the sale of their own property (as opposed to acting as a professional lender). However, these exemptions are not universal, and the details vary considerably:

• States with broad exemptions: Arizona, Delaware, Idaho, Nevada, South Dakota, Utah, and Wyoming effectively have no usury caps for written agreements, making them favorable for seller financing at competitive rates.
• States with moderate restrictions: Florida (18% general, 25% under $500K), Texas (18% written agreement), and North Carolina (16% or T-bill rate) allow reasonable interest rates but impose clear ceilings.
• States with strict caps: Michigan (7%), Pennsylvania (6% under $50K), West Virginia (8%), and Vermont (12%) have lower caps that can impact the attractiveness of seller-financed notes.

Impact on Note Marketability

When you decide to sell your mortgage note, the interest rate on the note directly affects its market value. Notes with higher interest rates are generally more valuable to note buyers because they generate greater cash flow. However, if the interest rate exceeds the state usury limit, the note may be:

• Void or voidable in whole or in part
• Subject to principal forfeiture in states with harsh penalties
• Uninsurable by title companies
• Unsellable on the secondary market, as no institutional buyer will purchase a potentially unenforceable note

Dodd-Frank Act and Seller Financing

The Dodd-Frank Wall Street Reform and Consumer Protection Act added another layer of regulation to seller financing. Under Dodd-Frank, anyone who offers or negotiates the terms of a residential mortgage loan is considered a "mortgage loan originator" and must comply with federal licensing requirements, unless a specific exemption applies.

The key seller-financing exemptions under Dodd-Frank include:

• 3-property exemption: A seller who finances three or fewer properties in any 12-month period, and who owned the property securing the financing, is exempt from loan originator licensing requirements.
• 1-property exemption: A seller who finances one property per 12-month period has additional flexibility, including the ability to offer adjustable-rate financing.
• Rate requirements: For the 3-property exemption, the interest rate must be fixed or, if adjustable, may only adjust after 5 or more years with reasonable annual (2%) and lifetime (6%) caps.
• Balloon payment restrictions: The 3-property exemption prohibits balloon payments. The 1-property exemption allows them in some circumstances.

Critically, even when a seller-financing exemption under Dodd-Frank applies, the transaction must still comply with state usury laws. The usury limit acts as an absolute ceiling that Dodd-Frank does not override.

Best Practices for Seller-Financed Notes

To create a note that is both legally compliant and marketable on the secondary market, follow these guidelines:

1. Research the usury limit in the state where the property is located before setting the interest rate.
2. Stay well below the usury ceiling to provide a margin of safety. A rate that is technically legal but close to the limit may raise red flags with note buyers.
3. Use a written agreement that clearly states the agreed-upon interest rate. Many states impose a lower default rate when there is no written agreement.
4. Consult with a real estate attorney familiar with the laws in the property's state to ensure full compliance.
5. Document the transaction thoroughly to demonstrate compliance in the event of a future challenge.

Federal Usury Regulations

While usury laws are primarily a state matter, several federal laws significantly impact how interest rate limits are applied in practice.

Depository Institutions Deregulatory and Monetary Control Act of 1980 (DIDMCA)

The DIDMCA was a landmark piece of federal legislation that fundamentally changed the usury landscape in the United States. Key provisions include:

• Federal preemption for banks: Section 501 of DIDMCA preempted state usury laws for first-lien residential mortgage loans originated by federally insured banks, savings institutions, and credit unions. This means these institutions can charge market rates on first mortgages regardless of state usury caps.
• State opt-out provision: DIDMCA allowed states to opt out of federal preemption by enacting legislation to override it. Some states exercised this option, particularly for consumer protection purposes.
• Rate exportation: Federally chartered banks can "export" the interest rate laws of the state where they are headquartered to borrowers in other states. This is why major credit card issuers are often chartered in Delaware, South Dakota, or Nevada, which have few or no usury limits.

National Bank Act (Section 85)

Section 85 of the National Bank Act allows national banks to charge the maximum interest rate permitted in the state where the bank is located, regardless of where the borrower resides. Combined with the "most favored lender" doctrine, this effectively allows national banks to choose to be chartered in states with the highest (or no) rate limits.

Marquette National Bank v. First of Omaha Service Corp. (1978)

This Supreme Court decision established that a national bank may charge the interest rate allowed by its home state to borrowers in other states, even if the borrower's state has a lower usury limit. This decision laid the groundwork for the modern credit card industry's concentration in states like South Dakota and Delaware.

Impact on Private Lenders and Seller Financing

Federal preemption generally does not apply to private lenders or individuals who provide seller financing. This means that seller-financed notes remain subject to state usury laws in full. The federal preemption benefits are reserved for federally chartered depository institutions and, in some cases, their assignees. This distinction is critical for note holders and sellers to understand: simply because a bank could charge a higher rate does not mean an individual seller-financier can do the same.

Consequences of Violating Usury Laws

The penalties for violating usury laws vary significantly by state, but they can be severe. Understanding these consequences is essential for anyone involved in lending or seller financing.

Civil Penalties

• Forfeiture of excess interest: In many states, the lender must return the amount of interest charged in excess of the usury limit. This is the mildest penalty.
• Forfeiture of all interest: Some states require the lender to forfeit all interest on the loan, not just the excess. The borrower must still repay the principal but owes no interest.
• Forfeiture of principal and interest: In the most severe states, a usurious loan can result in the lender losing the right to collect both principal and interest. The entire loan is rendered unenforceable.
• Treble damages: Some states allow the borrower to recover two or three times the amount of excess interest paid, as a deterrent against usurious lending.
• Voiding of the loan: In certain jurisdictions, a usurious loan is void from inception, meaning it was never legally valid.

Criminal Penalties

Several states impose criminal penalties for egregious usury violations:

• New York: Criminal usury (charging more than 25%) is a Class E felony, punishable by up to four years in prison.
• Georgia: Charging more than 5% per month (60% annually) constitutes criminal usury.
• Florida: Willfully charging more than 25% on loans over $500,000 is a felony.
• Massachusetts: Criminal usury applies to rates exceeding 20%.

Impact on Note Sales

Beyond the direct legal penalties, a usurious note is essentially unmarketable. Professional note buyers, including firms like Amerinote Xchange, conduct thorough due diligence on every note they purchase. A note that violates usury laws will be declined because the buyer would inherit the legal risk. This means the note holder is stuck with an unenforceable asset that cannot be sold, traded, or used as collateral.

FAQ: Common Questions About Usury Laws

Usury Glossary of Terms

• Usury: The practice of charging an excessively high or illegally high interest rate on a loan. The specific threshold depends on state law.
• Legal Rate of Interest: The default interest rate set by state statute that applies when no specific rate is agreed upon in a contract. Also sometimes called the "statutory rate."
• General Usury Limit: The maximum interest rate a lender may charge on most types of loans under state law. Exceeding this rate constitutes civil usury.
• Contract Rate: The maximum interest rate that parties may agree to in a written contract. In many states, this is higher than the general usury limit.
• Judgment Rate: The interest rate that accrues on unpaid court judgments, set by state statute or determined by the court.
• Criminal Usury: An interest rate threshold above which charging interest becomes a criminal offense, typically a misdemeanor or felony. Not all states have criminal usury statutes.
• Rate Exportation: The practice by which a federally chartered bank charges the interest rate allowed by its home state to borrowers in other states with different usury limits.
• Federal Preemption: The principle that federal law overrides state law. In the context of usury, the National Bank Act and DIDMCA preempt state usury laws for federally chartered depository institutions.
• DIDMCA (Depository Institutions Deregulatory and Monetary Control Act of 1980): A federal law that preempted state usury laws for first-lien residential mortgage loans made by federally insured institutions and allowed states to opt out of preemption.
• Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), which among many other provisions, established new rules for mortgage loan originators and seller financing.
• Seller Financing: A real estate transaction in which the property seller provides financing directly to the buyer, rather than the buyer obtaining a loan from a bank or mortgage company. The seller holds the mortgage note.
• Mortgage Note: A written promise to repay a specified sum of money plus interest at a specified rate and for a specified length of time, secured by a mortgage on real property.
• Effective Interest Rate: The true cost of borrowing when all fees, points, and charges are included in the calculation, as opposed to the stated or nominal rate.
• Forbearance: An agreement between a lender and borrower to temporarily reduce or suspend payments, often used to avoid default or foreclosure.
• Treble Damages: A legal remedy in which a court awards three times the actual damages as a penalty, sometimes available to borrowers who have been charged usurious interest.
• Void vs. Voidable: A "void" contract is treated as if it never existed and cannot be enforced. A "voidable" contract is valid until one party chooses to cancel it. The distinction matters because some states treat usurious loans as void and others as voidable.
• Most Favored Lender Doctrine: A legal principle applied in some states that allows any lender to charge the highest rate that any class of lender (such as banks or licensed lenders) is permitted to charge, even if the lender does not hold that specific license.