In any critical discussion of payday loans, you are likely to find a discussion of usury laws as well. Usury laws are legal restrictions place on lenders that prevent them from taking advantage of borrowers. As with all state legislation, usury laws will vary depending on the state you are in. In some states, laws have been implemented that effectively keep payday loan lenders from operating, while in others such laws have still allowed for these businesses to continue. Such laws have a long and important history not only in America but in the world, and have strong implications for the payday loan business.
Usury is the act of charging exorbitant amounts of interest for loans. This practice has been repeatedly condemned throughout history, and usury laws have been implemented in several cultures around the world in order to prevent borrowers from being taken advantage of. The oldest reference to usury is found in the Vedas of ancient India, and describes any individual who lends money for interest. This description is repeated in later Hindu and Buddhist texts, both of which condemn the practice, and led to various usury laws in those cultures. As time went on, the term usury began to be applied only to those lenders who charged interest rates that were deemed excessive by the general populace, rather to all lenders who charged interest.
In Greco-Roman traditions, this flux in the definition of usury likewise influenced a wide range of laws. At one time, such laws prevented interest from being charged altogether, while at other times, interest rates were allowed but restricted. This reflects the relative and undefined nature of the term usury, as it seems that what would be labeled usury would change according to the notions held by the political figures in power. While usury is discussed in Judeo-Christian texts as well, scholars have likewise failed to come to a consensus on what usury is according to these traditions.
This inability to define usury has continued to the present, with different states and countries passing wide varying usury laws. In thirteen states, usury laws have led either directly or indirectly to the ban of payday loan lenders. Many people see this as clear evidence that these loans are in fact usury and are thus unethical. However, payday loan lenders are still able to operate in thirty seven US states, and this can be given as evidence against the idea that such businesses fall under the category of usury.
The fundamental problem and point of discussion in this debate is in defining what counts as excessive interest. As previously noted, at several times in history in various cultures around the world, any amount of interest invited the label of usury, and any such lending practice would be outlawed. That means that a home loan with 1.9% interest would be considered usury and would not be a legal option for those seeking to purchase a home in today's society.
Of course, payday loan rates are much higher, and as such they warrant more detailed and thorough discussion in terms of whether or not they can be considered usury. However, due to the continually changing public opinion on what counts as excessive interest, it is unlikely that any consensus will be made as to the status of such loans in this respect in the near future.