Did you know this about loan interest rates?

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After seeing how some credit card rates are now up to 36% I googled what the legal limit is. I thought it was 29%. It turns out that there isn't really one.

You've probably heard of usury laws, i.e. laws put in place to prevent a lender from gang banging you on his rates. Most states have these and here you can see the rates, they are typically like 8% or low teens or that kind of ballpark.

However, if you borrow out of state from a state that doesn't have them the laws don't apply. Further (from last link)

In
fact, due to high inflation, in 1980, the federal government passed a
special law which allowed national banks (the ones that have the word
"national" or the term "N.A." in their name, and savings banks that are
federally chartered) to ignore state usury limits and pegged the rate of
interest at a certain number of points above the federal reserve
discount rate.

I realize there are arguments for and against, nothing is Black&White and all that, but the practical implication is that if I felt like lending my next door neighbor who let's say has crappy credit, a loan at 12% it would not be legal in my state. I couldn't even guarantee him that rate for the life of our loan, so if he went on the open market he may get a credit card at, let's say, 22%. But then at a whim they can decide to jack his rate up into the 30's. Just because.

The de facto limit on credit cards has been 29% (worse case) or maybe 22% (likely limit if you have bad credit) in recent years but is obviously climbing up.

I think this can all be summarized in this simple statement: If you borrow money from a person at a non-fixed rate you should always make sure that you could either pay that loan off tomorrow if the rate goes stratospheric or make sure that the rate is otherwise constrained (e.g. mortgage ARM with maximum rate it can ever hit or a credit line pegged to the prime rate, so at least an individual lender cannot screw you without the prime rate going high).

 

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Oh I should mention the new CC laws kicking in will prevent a current debt being jacked in rate _on the existing balance_. I know that Citi does that now, at least they did when they raised my rates, but I am not sure if it's been a courtesy to date--I think it has been.

 

[waggy]

CC companies are shooting themselves in the foot. i know a few that have had CC rates raised to 30+% evne t hough they have good credit and do not miss payments. so they are canceling those cards and takeing the credit hit.

i do think anything above 20% should be against the law. thats just insane.

 

[soccerballtux]

I think it's silly there is 0.9% financing for a new Lexus but Citi was willing to gie me 11.5%+ a 6% loan origination fee for a student loan for my last year. Earlier this summer I could have gotten 7%.
That's not really related though.

 

[StageLeft]

Originally posted by: waggy
CC companies are shooting themselves in the foot. i know a few that have had CC rates raised to 30+% evne t hough they have good credit and do not miss payments. so they are canceling those cards and takeing the credit hit.

i do think anything above 20% should be against the law. thats just insane.

I don't think their algorithms are perfect plus to a degree they are just trying to see who will blink first. My citi card generally received very little use, perfect history, etc. but they raised its rate last year. I now simply never use it at all and within reason there is no point in the future in which I will because as they pull my credit for these occasional reviews they can see I have lots of credit with another card, so it's not like I would even be forced to use their card. In my case they are only hurting themselves by jacking the rate up. If all the companies are in cahoots (and they all are jacking up rates, etc.) though they do get to grind down those who cannot pay off their CC debt.

 

[Ausm]

Bank at a credit union problem solved. IF Chase or any other bank jacked up my rates like that, I would go elsewhere.

 

[IronWing]

Interest rates on credit cards were/are, in theory, set based on the risk to the lender. CC debt was an unsecured signature loan with no real recourse on the part of the lenders. Basically the lender made the loans based on a promise to pay it back on the part of the borrower. Rates were therefore high. However, in 2005 under the moniker of bankruptcy reform, Congress and the White House stepped in and rewrote the credit laws to change the terms of CC debt in favor of the lenders. Hundreds of billions of dollars in contracts were rewritten by fiat to the benefit of one party at the expense of the other. The lesson is that when banks scream about government intervention in the mortgage business to help head off foreclosures and the sanctity contracts of we should take their whining with a great handful of salt.

 

[jdjbuffalo]

These rate do keep going higher and higher and I do believe they are already at usury rates. I saw a story the other day that one person got a CC offer for a rate of 79% APR!

One thing that a lot of people don't know is that if they raise your interest rate (assuming it's not a temporary low rate, like 0% APR for the first 6 months) it is technically a change to your contract. You have always had the right to reject this change within 30 days and keep your old interest rate. The downside to this method though, is that they will close your account. You can continue paying at the old rate until it's paid off but this will likely negatively affect on your credit score because you'll have a lower available credit and if this is one of your oldest lines of credit then you could lose some more points.

 

[OCGuy]

Dont get a credit card from a bank in South Dakota. The laws are based on the state the bank is based, and SD loosened it's usury laws completely to attract banks.

 

[Vette73]

Originally posted by: Ausm
Bank at a credit union problem solved. IF Chase or any other bank jacked up my rates like that, I would go elsewhere.

:thumbsup:

 

[dmcowen674]

Originally posted by: jdjbuffalo
These rate do keep going higher and higher and I do believe they are already at usury rates.

I saw a story the other day that one person got a CC offer for a rate of 79% APR!

10-15-09 No, You're Reading That Right 79.9%

The offer is for a Premier card from First Premier Bank, which is based in South Dakota. On its Web site, First Premier says it is the country's 10th largest issuer of Visa and MasterCard credit cards.

The California Attorney General's office said there's nothing it can do about the cards since they are issued out of state and out of its jurisdiction.

A spokesman with the Federal Deposit Insurance Corporation (FDIC) said interest rate limits on bank cards are set by the individual state and not on a federal level. According to information on the South Dakota Legislative Web site, there is "no maximum or usury restriction." In other words, the individual bank can set its own interest rate limits.

It's not just the interest rate that's insidious; the fees aren't so hot either.

$250 limit card also has the following fees:

* $29 Account Setup Fee
* $95 Program Fee
* $48 Annual Fee
* $7 Monthly Servicing Fee ($84 a year)
* $20 Additional Card Fee

 

[StageLeft]

79% haha.

I read on wiki for credit cards that in brazil rates are often up to 240% but credit limits very low and most people just use them as a temporary convenience and pay off before they get dinged with actual interest.

 

[waggy]

Originally posted by: dmcowen674

Originally posted by: jdjbuffalo
These rate do keep going higher and higher and I do believe they are already at usury rates.

I saw a story the other day that one person got a CC offer for a rate of 79% APR!

10-15-09 No, You're Reading That Right 79.9%

The offer is for a Premier card from First Premier Bank, which is based in South Dakota. On its Web site, First Premier says it is the country's 10th largest issuer of Visa and MasterCard credit cards.

The California Attorney General's office said there's nothing it can do about the cards since they are issued out of state and out of its jurisdiction.

A spokesman with the Federal Deposit Insurance Corporation (FDIC) said interest rate limits on bank cards are set by the individual state and not on a federal level. According to information on the South Dakota Legislative Web site, there is "no maximum or usury restriction." In other words, the individual bank can set its own interest rate limits.

It's not just the interest rate that's insidious; the fees aren't so hot either.

$250 limit card also has the following fees:

* $29 Account Setup Fee
* $95 Program Fee
* $48 Annual Fee
* $7 Monthly Servicing Fee ($84 a year)
* $20 Additional Card Fee

yeap. my SIL has a CC from first Premier. i was amazed. she got a $200 limit but it had $250 of fees on it when she got it. she had to pay the fees off before she could use the card. i just shook my head and laughed.


though i can't say much i hate CC's. I have ONE that i keep in emergancy and pay off every month. i couldn't tell you the interest rate.

 

[JS80]

Originally posted by: waggy
CC companies are shooting themselves in the foot. i know a few that have had CC rates raised to 30+% evne t hough they have good credit and do not miss payments. so they are canceling those cards and takeing the credit hit.

i do think anything above 20% should be against the law. thats just insane.

That was their intention to reduce their credit exposure. CC company is the winnar there.

 

[imported_Lothar]

Originally posted by: Skoorb
79% haha.

I read on wiki for credit cards that in brazil rates are often up to 240% but credit limits very low and most people just use them as a temporary convenience and pay off before they get dinged with actual interest.

It's a shame that most Americans can't seem to do the same.

 

[imported_Lothar]

Originally posted by: waggy

Originally posted by: dmcowen674

Originally posted by: jdjbuffalo
These rate do keep going higher and higher and I do believe they are already at usury rates.

I saw a story the other day that one person got a CC offer for a rate of 79% APR!

10-15-09 No, You're Reading That Right 79.9%

The offer is for a Premier card from First Premier Bank, which is based in South Dakota. On its Web site, First Premier says it is the country's 10th largest issuer of Visa and MasterCard credit cards.

The California Attorney General's office said there's nothing it can do about the cards since they are issued out of state and out of its jurisdiction.

A spokesman with the Federal Deposit Insurance Corporation (FDIC) said interest rate limits on bank cards are set by the individual state and not on a federal level. According to information on the South Dakota Legislative Web site, there is "no maximum or usury restriction." In other words, the individual bank can set its own interest rate limits.

It's not just the interest rate that's insidious; the fees aren't so hot either.

$250 limit card also has the following fees:

* $29 Account Setup Fee
* $95 Program Fee
* $48 Annual Fee
* $7 Monthly Servicing Fee ($84 a year)
* $20 Additional Card Fee

yeap. my SIL has a CC from first Premier. i was amazed. she got a $200 limit but it had $250 of fees on it when she got it. she had to pay the fees off before she could use the card. i just shook my head and laughed.


though i can't say much i hate CC's. I have ONE that i keep in emergancy and pay off every month. i couldn't tell you the interest rate.

Her fault for not reading the terms/conditions and doing simple math.

 

[piasabird]

most of the cc banks raised all their rates before the law went into effect. I think Credit card rates are too quick to rise and they should reset like banks where they can only raise your arm so many points a year. This is why I do not use any credit cards. I think it is all funny money. Why would a consumer want to use a loan instrument that can go up at the whim of a bank whenever the bank wants to rise your rates. I think somone needs to come out with fixed rate credit cards. Also if you have the collateral to cover the credit card, like a motgage, then the bank should not have a right to raise your interest rate because it is secured credit.