Lending, Usury: Highest Interest Rate Allowed vs. APR


Our customer recently brought us a copy of his loan documents regarding a loan which he obtained from a small loan company headquartered in South Dakota that has an APR of 307.40% for a 27-day loan with a principal of $1,500.00.  This sounds something like a loan from the mob!  Is this legal?


It is probably legal.  Let me explain why.  First of all, you are probably confusing APR with the "highest rate allowed by law."  In Texas, the highest rate allowed on most loans, with some exceptions, is 18% which is provided in the Finance Code, Credit Title.  APR which is defined by Reg Z is the cost of the loan to the borrower which is reflected as a percentage rate.  It is a combination of the interest costs plus other fees and charges in connection with the loan as compared to the principal of the loan.  There is no upper limit to an APR, however, it must be disclosed so the borrower understands what the true costs of the loan are.  So, for instance, a $1,500 loan at 18% interest and a filing fee for a UCC-1 financing statement might have an APR of 18.5% which is legal because there is no upper limit on APRs and the interest rate is only 18% which is also legal.  One of the exceptions from the 18% interest rate cap for loans made in Texas is the Finance Code 342.251 loan.

But there is more at work here than simply an APR that is considerably higher than Texas’ interest rate cap.  In fact, your customer’s loan probably does exceed Texas’ 18% interest rate cap. And it is completely legal.  The lender simply exported the higher rate from South Dakota, which has extremely liberal usury laws. 

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