By David Pilley on May 2, 2011
.jpg.aspx?width=75&height=75) Unsecured loans have no fall back. Lenders give these loans to you often after looking at personal information, such as your credit score or your monthly income, but these are not absolute signs. They give unsecured loans based on faith that you will pay them back. Because unsecured loans are riskier than secured loans, lenders try to have more safeguards to make sure they make money. Interest and any late fees are how lenders make their money. As a consumer, you need to be aware of certain laws and regulations on these types of loans so you don’t end up getting swindled.
An important set of laws to be familiar with is usury laws, which set a limit on how high interest rates can be. There is no one specific federal limit, so each state has its own usury law that pertains to loans made within the state or through a company headquartered in the state. For example, my home state of North Carolina lists the maximum interest rate on a loan less than $25,000 at 16% or 6% above the current rate of competitive 6-month US Treasury Bills, and there is no limit if the loan amount is greater or if the loan is a mortgage greater than $10,000 (some additional fees are allowed by law, raising the effective interest rate above the cap). Another example, Massachusetts, has a maximum limit of 20% on any loan.
Some states like Alaska (10.5%) have a lower interest rate. Some states go by different federal rates. Arkansas and Delaware, for example, set a maximum according to the Federal Reserve Discount Rate. (Both have a limit of 5% higher than this rate.) Iowa, on the other hand, sets a maximum interest rate according to the monthly average 10-year constant maturity rate of US government bonds (no more than 2% higher than this rate). Some states also have different limits according to different loan amounts. Florida sets a maximum rate at 18% on loans less than $500,000, and a rate of 25% on loans higher than that amount. There are even some states that do not have a limit, including Maine, Nevada, and South Carolina.
If you are getting an unsecured loan online, you need to be aware of where the company is located because the usury law in effect comes from that state and not your home state. Therefore, if you live in North Carolina and you got a loan of less than $25,000 from a lender in Massachusetts, it is absolutely legal for the lender to apply a 20% interest rate. The reverse, however, would be illegal. If you are going to get an unsecured loan, you need to know the legal maximum on the interest rate. You need to know not just the law in your own state, but also the laws of other states. It’s for your own good.
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