Knowing About The Legal Rate Of Interest Definition According To Money Lending Law

You surely have come across the term ‘rate of interest’ but you may not know what the legal rate of interest is that the money lenders are entitled to charge you. According to the money lending law, a legal rate of interest is typically the highest rate of interest that a money lender can legally charge on any type of loan. This is the legal limit that every money lender must adhere to.

Typically, the legal rate of interest applies to all types and forms of debt irrespective of its amount. However, there are a few specific types of debt that may carry a higher rate of interest than the legal rate. These types of debts include a payday loan where the lender can charge higher rate of interest as compared to the legal rate of interest of a student loan.

The limit of this legal rate of interest is typically set by the government to prevent the money lenders including banks and other lenders such as Liberty Lending from charging excessive and unreasonable rate of interest from the borrowers.

More about the legal rate of interest

Any money lender charging the borrower an interest that is in excess to the legal rate of interest is typically classified as usury.

When a money lenders charges such high rate of interest there are stiff penalties for it in most of the states. These penalties can be:

• Fines
• Forfeiture of principal
• Elimination of interest.

The legal rate of interest also implies the highest rate of interest that any money lender can charge on any debt for the legal claim which can be typically enforced in a court of law.

If you consider the money lending market of the United States there are a few individual states that set and practice their own interest rate laws. This type of financial practice typically falls under the commerce clause of the Constitution. The Congress on the other hand has not focused on the traditional usury. That is why the government does consider the collection of interest payments by using any violent means as a federal offense.

The basic facts of legal rates of interest and the laws that govern it include:

• It is the highest amount of interest that any money lender can charge a borrower while giving out any loan
• It may differ from one jurisdiction to another in the US where each state has and defines its own legal interest rate
• It is basically related to the practice of usury and usury laws.

There are specific ways in which this legal rate of interest is applied in different jurisdictions.

• In the US each state may set and follow a legal rate of interest according to their respective laws. For example, in New York the legal rate of interest is set at 9% while the legal rate of interest of Delaware5% above the rate of the Federal Reserve. His makes this legal rate of interest subject to fluctuations.
• Apart from these specific limits, each state in the US typically sets a distinctoverall usury limits. This may be higher as well. While this limit is set at 16% in New Yorkfor civil usury only, it is as high as 25% for criminal usury.

All banks and other financial companies that providefinancing are subject to the legal interest rate laws and set limits of the specific jurisdiction that they do business in.

• Once again, there are a few exceptions to the rule under specific circumstances in which the money lenders may be compelled tocharge interest rates that are in excess of the legal rate of interest of the specific jurisdiction.
• On the other hand, even the customers are allowed to waive this protection as and when they apply for a loan.

However, money lenders and financiers will require an agreement that must be signed by thecustomers so that they can receive such funding under such amended conditions.

It is actually the language of the law that allows the money lenders or any financial company to charge interest rates that are higher than the legal rate of interest. These clauses may also be included in the terms of the loan.

In such situations, you must remember one specific thing. When a consumer agrees to receive financing at a higher rate of interest assigned by the money lender it will automatically override the protections that typically a legal rate of interest would offer. This is irrespective of the fact that the customer later confirms to fully being considerate of their rights.

Circumventing the law

Well, there are ways in which money lenders can bypass the law that governs the legal rate of interest. These are the ways that are much similar to those that they sue to circumvent the usury laws. For example:

• When a credit card provider is allowed to charge interest rates that are in accordance to the state in which the credit card service provider is incorporated and operates its business as opposed to the states where thecustomers live and
• The money lender may choose to incorporate their business and operate in a state such as Delaware where typically the usury laws are more relaxed as compared to the other states in the US has typically in offer.

All credit card companies usually enjoy the benefit of being allowed to charge interest rates that are allowed by the state in which it incorporates and operates. They do not typically have to follow the usury laws that are applicable in the state where the borrower lives.

As for the nationally chartered banks are concerned, they can similarly apply the highest rate of interest as allowed by the state only when they are incorporated in that particular state.

Therefore, as you can see, just as the rate of interest on a specific loan is complex and determines the eventual amount of the loan that you will have to repay, the legal rate of interest is also similarly complex subject that you need to understand.