“Hey Dad, what’s the highest interest rate a company can charge on a loan?”
You will need to understand the Usury Laws to answer that question, kids:
Usury Laws set a limit on how much interest can be charged on credit cards, personal loans, and payday loans. Annual Percentage Rates (APR) are regulated by the individual states. Know that states also have Annual Percentage Rate Caps based on the amount of the loan.
In 2017, a $500 6-month loan in Mississippi had a maximum APR cap of 305%. It would have cost you over $2,000 to repay that $500 loan in full, in 6 months. “Sounds crazy, right?” Yeah, well there was no interest rate cap at all in Delaware during that time. For a $2,000 2-year loan in New Mexico, the maximum APR cap was 175%. And again, there was no interest rate cap at all in Delaware. And for a $10,000 5-year loan, Georgia took the top spot with a maximum cap of 60%. Again, Delaware had no cap. That’s just scary! Oddly enough, there are people who take out these ridiculous loans and say, “desperate times call for desperate measures”.
During the pandemic, I received a letter in the mail that had a check attached in the amount of $3,504.76, which read, “Endorse and Deposit”.
Someone who was experiencing a financial hardship could potentially believe that a $190.00/month payment for 30 months is a doable option for $3,504.76 in cash in their hands right now (“A bird in the hand…”). Unfortunately, we tend to focus on the affordability of a monthly payment rather than understanding the long-term financial implications of that decision. This practice is also described in the “Dream Car” blog. The desire to have it now puts our future self in extreme financial jeopardy. And once you’re in that position, it’s hard to get out.
The letter that I received included a Truth-In-Lending Disclosure which provided information about all charges and fees associated with the loan. Everything was in plain sight. The 41.72% Annual Percentage Rate (APR), the $2,195.24 finance charge, the $219.54 prepaid finance charge, the 5% insufficient funds fee, and the 5% fee for a late payment. That’s right, deposit that $3,504.76 check and you’ll pay back $5,700 or more. They are counting on you to be late with a payment or two, so they can collect more in fees. You don’t have to be a “Math Wiz” to know that depositing that check is a bad idea.
Know that this Truth-In-Lending disclosure is required under the 1968 federal law, called The Truth in Lending Act (TILA), also known as “Regulation Z”, created to promote honesty and clarity by requiring lenders to disclose terms and costs of consumer credit.
With respect to credit cards, which fall under this same requirement, know that there is no federal regulation on the maximum interest rate that your credit card issuer can charge you. As of July 2023, the highest credit card interest rate was 36% on the First PREMIER® Bank Mastercard Credit Card. The next highest credit card interest rate was 35.99%, charged by the Total Visa® Card and the Milestone® Mastercard®. The best thing is not to carry a balance on your credit card and not fall for these types of direct mail offers. “Manage your money wisely”.