Usurious Contract

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Usurious Contract

A Brief Introduction About the Usurious Contract

Usury is defined as the tradition of giving unscrupulous loans which are solely pointed towards benefiting the creditor. Here in this context, it concentrates on a contract between two people or groups between whom the money lending activity has happened. Such a loan contract that entails excessive interest rates referring to the rates set by the law is called a usurious contract (Masciandaro, 2002). People who practice usury are called usurers.

It is also referred to as loan-sharking contract as it is illegal to lend money at a usurious rate, such contracts are threatening for its exorbitant rates charged and for the penalties imposed in case of failure of repayment. A usurious contract is a void contract, and the rate in it is itself a resistance to non-payment. Any kind of usury defense can only be asserted by the original borrower.

The maximum limit permitted by law in the majority of the nations cannot exceed 18% per annum simple interest. If any loan that exceeds this limit can thus be declared as a usurious loan. Various usury laws are there to help and aid the borrower’s rights and protect his vulnerability at the time of such a necessity. Such laws help in setting an upper limit to the interest rates on debts to protect consumers from getting exploited. Any loan which charges higher than the legally permitted interest rate is called usurious and is prohibited by the law.

Who Takes the Usurious Contract – People Involved

This contract involves two parties that are bound together by any loan, line of credit or debit and are referred to as a lender and a borrower. In such a usurious loan, these lenders and borrowers could be individuals or a group of people together. While lending the money, they both sign this agreement stating the loan amount, and after a certain period, the borrower would be charged an excessive interest rate.

Purpose of the Usurious Contract – Why Do You Need It?

The purpose of a usurious contract is to describe the contract between the two parties involved. It also defines the roles and responsibilities of each party and provides the duration of the contract that is the effective date when the contract becomes operational until the contract stays valid. Other loan contracts are compliant with the state-federal regulations, but a usurious contract defies the usury laws (Rigbi, 2013).

This contract regulates the performance commitments expected from both the parties as per the contract terms. It specifically states the proceeds of the contract. This signed contract though prohibited by the law is a written proof of the committed amount offered as a loan and not a gift and has the loan payment details.

Contents of the Usurious Contract – Inclusions

usurious contract includes the following: –

  1. Loan Amount – The content of the agreement comprises of the loan amount. This amount specified in the contract is the amount the borrower agrees to repay, this amount exceeds the actual amount borrowed as it involves the borrowed amount as well as the other various costs involved like interest and other financial costs
  2. Name – It includes the name of the borrower and the lender, be it individuals or a party participating in the act of borrowing and lending of the money.
  3. Address – This requires the lender’s and the debtor’s residential address lending and borrowing the principal loan.
  4. Effective Date – This is the effective date of the contract signed is the date from which the contract becomes operational. It might be prior, or post to the contract signed date but is one that binds both the parties to this contract.
  5. Payment Details – This comprises the payment details of this contract between the parties’ lending and borrowing the money. It gives the particulars of the loan, the principal amount, the accrued interest rate, the mode of repayment could be weekly, monthly, or yearly. This also gives the date on which the repayment is made or starts.
  6. Interest Details – This gives the details of the interest rate in percentages borne by the borrower. It also states the usurious rate (Rigbi, 2013) stated in the borrower state.
  7. Validity – The contract must have a validity date specifying the duration of the contract between the two parties.
  8. Objective – The contract must provide a short explanation of the purpose of the contract, stating what it is and why it is being signed.

How to Draft the Usurious Contract?

  1. The first step is to determine the usurious loan terms. This involves the principal loan amount, the repayment installments, and the usurious rate of interest on the loan amount.
  2. Step two involves the payment calculations based on the interest rate decided. Each payment includes both the principal and the interest components and provides the number of payment months.
  3. Step three is crucial as it caters to many essential points. While drafting the contract, it is necessary to keep in mind the parties involved in this contract, the due dates, the clause that states the consequences of the contract violation (Posner, 1995).
  4. Step four would involve the mention of loan security if any, in the contract. In case of the attachment of any security to the loan, it should suggest the rights of both the borrower and the lender concerning the security involved.
  5. While drafting the contract, the objective of the contract must be mentioned, providing the details of why this contract is being signed.
  6. It is important to have the right contract format. Sample can be accessed through the law agents.
  7. Proofreading is a must to validate the details mentioned in the contract.

Negotiation Strategy

Negotiation usually happens before a contract is signed. This involves both the parties, borrower, and lender to sit down together and work out the contract details. This might involve the determination of usurious interest rates and the penalties in case of the breach of the contract. For any negotiation, one needs to do all the research required before getting into the contract, facts must be quoted while negotiating, question the demands rather than arguing, and there is no harm in asking for a fair approach.

Benefits & Drawbacks of the Usurious Contract

We know usurious contract is in nature not good as they impose exorbitant interest rates from the borrowers which exceed the rates set by the law. But still, if we have some written proof that this contract exists, it helps both the parties to protect the legal interests. Mentioned below are the


  1. It provides clarity on the contract, and the rights of the parties involved
  2. Prevents possible contract disagreements or litigation
  3. Inhibits misinterpretation of the contract
  4. Provides agreed measures to resolve a dispute
  5. It helps in limiting the flexibility of the contract.

Drawback – Creating usurious contract is a time-consuming process as it requires both parties to sit together and argue for the details to be included in the contract. It requires a thorough review and is complicated. But the most critical drawback of this contract is that it binds the borrower in a complex circle of outrageous interest rate payment which is not even allowed by the government and is not legal (Posner, 1995).

What Happens in Case of Violation?

Just like any other contract, violation of this contract would mean breaking the contract by breaching the contract. This may happen when the borrower is unable to pay the loan amount as stated in the contract or the lender demands a further higher interest rate as stated.

A violation happens when either of the party is unable to fulfill the obligation. In case of any such violation, either party is eligible for either compensatory damages or incidental damages. Such remedies are often incorporated in the contract (Bowsher, 1974). Before any legal action is taken, the contract must be reviewed in detail and carefully to understand the limitations involved. Various usury laws(1) can be referred to understand the matter in detail that is being referred to.

In conclusion, usurious contracts bind the borrower into an unethical and unlawful rate of interest. This kind of contract unfairly benefits the lender by taking advantage of somebody’s misfortune. It is crucial to be cautious of the usury laws while getting into a loan contract. These laws prevent lenders from charge extreme interest rates. They help in protecting people from getting into such lending practices, and the law of each nation sets a maximum interest rate limit.