In all states within the United States, interest may be charged on money loaned to a consumer, or may accumulate on certain legal debts such as a judgment obtained against a debtor. Although it may be legal to charge interest on either loans or outstanding judgments, many jurisdictions set a legal rate of interest that may not be exceeded. As a rule, the legal rate of interest that a lender may charge a borrower is set by statute and may only be changed by the legislature. On the other hand, the interest charged on a judgment is frequently subject to change once a year, generally in October.
In order to protect consumers from predatory lending practices, most states within the United States have set a maximum rate of interest, also known as a usury limit, that a lender may charge a borrower on money owed. Although the usury limit, in theory, is intended to protect consumers, the legal rate of interest may actually be higher for many loans than the state's usury limit. The reason for this is that the usury limit does not apply to all types of loans.
National banks are not bound by the legal rate of interest within any specific state for most loans. When the federal government originally excluded national banks from usury limit laws, national banks were the exception to the rule; however, the majority of banks in the United States are now considered national banks, meaning that most bank loans are exempt from legal rate of interest statutes. In many cases, other finance companies or installment loans are also excluded from state usury limits.
The other area where legal rate of interest laws play an important role is in the accrual of post-judgment interest. When a borrower defaults on a loan, or when a person owes money for any reason, the creditor may file a lawsuit in the appropriate court and seek a monetary judgment against the debtor for the amount owed. If the judge is convinced that the money is, indeed, owed to the creditor, then a judgment will be entered against the debtor. A judgment is a court order stating that money is owed from one person or business to another person or business.
Most states also allow a judgment to start collecting interest from the time the judgment is entered with the court. Post-judgment interest is separate and distinct from pre-judgment interest. States also have a legal rate of interest that may be charged on post-judgment debt. Post-judgment interest rates typically change once a year and are often tied to the federal reserve discount rate.