Legal Rate of Interest
Candlefocus EditorThe legal rate of interest varies from jurisdiction to jurisdiction, as it is determined by each state’s respective statutes. Most states have limits based on the annual percentage rate (APR) for a given loan. The APR is the amount of interest over a year and will include other charges such as fees. For example, states may select 10%, 12%, or 15% as the upper limit that can be reported as the APR.
Though legal limits are set, lenders can still charge a rate that exceeds the upper limit, but as stated earlier, it is classified as usuary and it carries a stiff penalty. In most states, usuary rates are established at an amount three times that of the legal rate and lenders who violate these limits can face a fine or imprisonment.
Legal interest rates are also important in protecting smaller borrowers and ensuring responsible lending. Interest rates that exceed the upper limits of the legal rate may force some borrowers into bankruptcy. This prevents them from fully renegotiating their debt or paying them off in full, thus leading to series of defaulted debt payments.
Overall, legal interest rates are important for protecting borrowers from excessive debt and ensuring responsible lending. Each state regulates its own rate of interest and usuary rates, and lenders must adhere to these laws as penalties for violations are quite severe. By protecting borrowers from excessive debt and encouraging responsible lending, legal interest rates form an important part of the overall economy.