9 States Have No Interest-Rate Cap. In the Other 42, Charging Too Much Can Void Your Loan.

Here is the thing almost nobody checks before they write a loan to a family member or a friend: the usury limit, the maximum interest rate your state lets a private lender charge. We reviewed all 50 states and DC, and the rules split into two very different camps. In nine states you can agree to any rate you want, as long as it is in writing. In the other 42, there is a hard ceiling, and charging above it can quietly gut your loan.

The 9 states with no usury cap

Nine states let the parties set whatever rate they agree to in writing, with no statutory ceiling on a standard private loan: Arizona, Idaho, Maine, Nevada, New Hampshire, New Mexico, South Dakota, Utah, and Wyoming. That does not mean anything goes forever. It means the written agreement is what governs, so the rate has to actually be spelled out and signed. A handshake at "whatever seems fair" is not a rate anyone can enforce.

If you live in one of these nine, your job isn't to find a legal maximum. It's to pick a number you can defend as reasonable and get it in writing. Freedom to set the rate is not the same as freedom to be predatory, and a judge can still look sideways at a rate that shocks the conscience.

It is worth understanding why these states landed here. Several of them, South Dakota and Utah in particular, deliberately stripped out their usury ceilings decades ago to attract credit card banks, and the effect spilled over into private lending. For you the point is narrow: the absence of a cap is a freedom you have to use carefully, not a loophole that protects you if the rate is unconscionable. Write the rate, sign the rate, and keep it somewhere a court would consider fair for a friend or family member.

The other 42 states set a ceiling, and it varies a lot

In the remaining 42 states, there is a legal cap on the rate a private loan can charge. What surprises people is how wide the spread is. In our review, the general ceiling ranges from 5% in Delaware, the lowest we found, to 25% in Michigan, the highest. That is a fivefold difference depending entirely on where you sign.

Because the number swings that hard from state to state, a rate that is perfectly legal for your cousin in one state could be illegal for you. This is exactly why you cannot copy a friend's loan terms and assume they carry over. The cap follows the deal, not the person.

One more wrinkle worth knowing: many of these states have a "general" cap for loans with no agreed rate and a separate, higher ceiling for loans where the parties agree to a rate in writing. That is another reason the written note matters. In some states, writing the rate down is literally what lets you use the higher legal ceiling. Skip the paperwork and you may be stuck at a lower default cap you never intended to accept.

What actually happens when you charge too much

People assume the penalty for going over the cap is a slap on the wrist. It is usually worse, and it lands on the lender, not the borrower. Across the 42 capped states, the consequences we saw range from forfeiting the excess interest, to forfeiting all interest on the loan, to criminal usury in extreme cases.

Read that middle one again. In several states, charging even a little over the line does not just knock you back down to the legal rate. It can wipe out your right to collect any interest at all, turning your carefully priced loan into a zero-percent favor. In the harshest cases, you are no longer arguing about interest. You are looking at criminal exposure.

Why this bites private lenders hardest

Banks have compliance departments. You have a template and good intentions. That is the gap. A private lender writing a note to a sibling or a small-business partner is the person most likely to pick a round number like 10% because it "sounds fair," without ever checking whether 10% is legal where they live. In Delaware, on a plain private loan, it may not be.

The borrower, meanwhile, has every incentive to notice. If payments get tight and someone mentions the loan was usurious, that becomes a defense. Suddenly the friendly loan you documented so carefully is the exhibit being used against you.

There is also a timing trap. Interest that looks fine on day one can drift over the line as it compounds, or a late fee stacked on top of the rate can push the effective charge past the ceiling even when the stated rate is clean. Courts often look at the true cost of the loan, not just the number you typed. That is another argument for building in cushion: a rate a few points under the cap absorbs those surprises, while a rate parked right at the limit has nowhere to go but over.

How to price a rate that stays safe

The move is boring and it works: pick a rate that is fair but sits comfortably under your state's cap, not right at the edge of it. If your ceiling is 12%, do not write 12%. Leave yourself room so that a rounding argument, a compounding quirk, or a late-fee that reads like disguised interest cannot push you over the line.

Before you settle on a number, run your state and rate through our usury limit checker so you are working from the actual ceiling rather than a guess. Then price under it. A slightly lower rate that is fully enforceable beats a higher rate that a court can void.

The bottom line

If you are in one of the nine no-cap states or one of the 42 with a ceiling, the written rate is what protects you. In the no-cap states, writing it down is what makes it enforceable at all. In the capped states, writing a defensible, under-the-limit rate is what keeps the whole loan from unraveling. Either way, the number belongs in a real promissory note, not in your memory of the conversation.

Sources

• Our 50-state and DC usury review
• Cornell Legal Information Institute: Usury