Originally this word meant any taking of money for the use of money; and he was therefore a usurer who, lending money, required in payment anything more than the amount which he lent. This was once considered a great moral wrong, but it is no longer deemed more wrong to take pay for the use of money than for the use of a house, or a horse, or any other property. But the lingering influence of the former opinion, together with the fact that the nature of money makes it easier for the lender to oppress the borrower, has caused nearly all Christian nations to fix by law the rate of compensation for the use of money. If compensation be taken within this limitation of law, it is called interest; but if more be taken than the law allows, this in the present meaning of the word is usury. The opinion that money should be borrowed and repaid, or bought and sold, upon whatever terms the parties should agree to, like any other property, has of late years gained ground almost everywhere; and where usury laws are in force, this opinion has perhaps exerted some influence upon adjudication.
In England, in the reign of Henry VIII., interest at 10 per cent, was made lawful; in the time of James I. it was reduced to 8 per cent.; during the commonwealth it was 6 per cent., and this was again enacted by 12 Charles II.; the statute of 12 Anne reduced it to 5 per cent. The act 3 and 4 William IV. exempted from the operation of the usury laws bills having more than three months to run. After several modifications in the reign of Victoria, the act 17 and 18 Victoria, ch. 90, repealed all laws then in force relating to usury, providing only that the rights and remedies of persons in respect to acts previously done should not be affected by the statute. - In the United States, the usury laws differ in different states, and are not perhaps precisely the same in any two. In Louisiana 5 per cent, is the legal rate; in Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, New York, South Carolina, and Wisconsin it is 7; in Alabama, Florida, and Texas it is 8; in California, Nebraska, Nevada, and Oregon it is 10; in all the others it is 6. But the statutes vary exceedingly as to the legal effects of usury.
In California, Florida, Maine, Massachusetts, Nevada, South Carolina, and Texas, the parties may agree on what rate they will, and the legal rate takes effect only in the absence of agreement; in New Hampshire, New York, North Carolina, and Tennessee, the whole contract is avoided by a reservation or agreement for more than the legal rate. Regarding these as extremes, in much the greater number the penalty for usury lies between them. In some states the legal rate takes effect when there is no agreement, but the parties may agree for more up to a certain definite limit. - There are many ways in which the usury laws may be evaded, and courts watch contracts liable to this abuse with great strictness. Some principles may be gathered from the adjudications, which may be regarded as prevalent, if not universal. Thus, to constitute usury, there must be substantially a loan, and a usurious intent in both parties, in one to give and in the other to take usurious interest. But the contract need not be, in form, a loan; and whether it is so in fact is a question for a jury. Property may be sold for whatever price the parties agree upon; but if the sale be in fact a mere cover for the usury, it does not protect it. Negotiable paper may be sold like other paper.
The cases on this subject are numerous, nice, and perhaps conflicting; but it may be stated as a general rule, that if it is in fact the promissor who sells, and the buyer buys even through an agent, but with knowledge that he buys of the promissor, it is in fact and in law a loan from the buyer, and may therefore be usurious. Even if a statute declares a usurious contract "void" in the most emphatic language, the law looks upon it rather as "voidable;" and therefore no one can make the objection of usury but the borrower and the parties in privity of interest and contract with him. So, if one borrows stock, agreeing to replace it with the dividends received in the mean time, or if he agrees to replace it, or the money it sells for, with interest on its value, the contract is not usurious; but if the lender retains an option to take either the dividends or interest, it is usurious. If a note be given usuriously in payment of or as security for a preexisting debt, and the note is void by the usury laws, the original debt remains unaffected. As there must be usurious intent, if illegal interest is taken by a miscalculation or other mistake in fact, it is not usury; but it is usury if the mistake be one of law, because every person is held to know the law.
If the lender takes upon himself an extra risk (apart from that of the borrower's insolvency), he may charge extra interest. Bottomry and respondentia contracts are founded on this principle, because if the ship or goods are lost, the debt is not demandable. The same principle is applied to the purchase of an annuity, and even to the bargain of the borrower that if he does not repay the principal when due with legal interest, he will pay a certain penalty, because he has the power of avoiding this penalty by payment of interest. If a borrower on repaying the money make the lender a gift, it is usurious if the gift be in performance of a previous promise, but not otherwise. Discount of interest, whereby the lender gets interest on his interest, or interest on money which he never lends, and calculations of interest by Rowlett's tables, which consider the year as consisting of only 360 days (but qualify the error by casting the fractions on the right side), are now established usages, and do not make the contract usurious, especially if it is of a kind that is usually subjected to this usage, as are bank discounts. Wherever usury is forbidden, a bargain for compound interest would not be enforced.
But it is common for courts to order a settlement of accounts with annual rests, which is equivalent to compound interest. This is especially done where trustees have used the money of their cestuy que trust.