How can some lenders legally charge 200% interest?
They're licensed. Lenders charging triple-digit rates operate under state licensing laws that set their own fee limits, separate from the usury caps that bind everyone else. A private person lending under a promissory note doesn't hold that license, so the ordinary cap still applies to them.
Every state has a general interest ceiling, and most also pass separate statutes for specific kinds of lenders: small-loan companies, payday or deferred presentment shops, and title lenders. Each of those statutes lets a licensee charge a stated fee even though the general usury law would forbid it. The license is what moves the lender out from under the cap. A lender who never gets one, or loses it, is back under the general rule.
What a licensed fee looks like as an APR
Alabama makes the gap easy to see. A private lender's written note under $2,000 is capped at $8 upon $100 for one year under Section 8-8-1, which is 8%. A deferred presentment licensee, the state's term for a payday lender, may charge a fee "not to exceed 17.5 percent of the amount advanced" under Section 5-18A-12, on advances of up to $500. Section 5-18A-13 sets the term at no less than 10 days and no more than 31 calendar days.
A 17.5% fee sounds smaller than it is until you annualize it. The simple APR method is the fee divided by the amount borrowed, times 365, divided by the number of days in the term.
| Loan | Cost | APR |
|---|---|---|
| Alabama private written note, $1,500 for one year | $120 at the 8% cap | 8% |
| Alabama deferred presentment, $500 for 31 days | $87.50 fee | 206% |
| Alabama deferred presentment, $500 for 14 days | $87.50 fee | 456% |
| Typical payday fee cited by federal regulators, $100 for 14 days | $15 fee | 391% |
Even the longest legal Alabama term, 31 days, works out to about 206%. That's how a lender can charge 200% and stay legal: the fee is lawful under the license, and the APR is just that fee restated as a yearly rate. The Consumer Financial Protection Bureau (CFPB) says a common charge of $15 per $100 "equates to an annual percentage rate of almost 400 percent for a two-week loan."
Installment lenders work the same way over longer terms. Take a $1,000 loan repaid in six equal monthly payments. At 36% APR, each payment is $184.60, and the borrower repays about $1,108. At 200% APR, each payment is $276.20, and the borrower repays about $1,657. That's roughly six times as much interest, $657 against $108, on the same $1,000.
Rollovers stack the fees. Section 5-18A-12 lets an Alabama licensee renew or extend a transaction with the same customer one additional time at the same fee. On a $500 advance, two back-to-back 14-day terms cost $175 in fees, and the borrower still owes the original $500. For comparison, $500 borrowed for 31 days at a 36% APR costs about $15.29 in interest. After the one rollover, the full balance comes due, and the lender may offer four equal monthly installments of what remains.
Title lenders follow the same pattern with a car as collateral, which makes the loan secured and puts the vehicle at risk on default. The math is just as steep. A fee equal to 25% of the loan for a 30-day term works out to about 304% APR, using the same formula as the table. Whether a fee like that is legal depends on the state's title loan statute, so check the licensing law where the borrower lives before assuming it's allowed.
Where 36% is the ceiling
Some states have pulled licensed lenders back under a cap. Illinois passed the Predatory Loan Prevention Act, 815 ILCS 123. Section 15-5-5 says that, notwithstanding any other provision of law, a lender "shall not contract for or receive charges exceeding a 36% annual percentage rate on the unpaid balance of the amount financed for a loan." A loan that breaks the cap is "null and void," and the lender has no right to collect or keep any principal, fee, or interest on it. The act's findings cite a state report that put the average Illinois payday loan at 297% APR.
Nebraska took a narrower route. Section 45-918 bars a delayed deposit licensee from imposing "an annual percentage rate greater than thirty-six percent," and a transaction that breaks the rule is void. That cap came from a voter initiative and covers payday transactions specifically.
Federal law sets a ceiling for military families in every state. The Military Lending Act rule, issued by the Department of Defense (DoD) at 32 CFR 232.4, says a creditor "may not impose an MAPR greater than 36 percent" on consumer credit to a covered borrower. MAPR, the military annual percentage rate, counts more than interest. It includes credit insurance premiums, fees for many credit-related add-on products, and most finance charges. Illinois adopted this same MAPR method to measure its own 36% cap.
None of this helps a private person who lends under a promissory note. The licensing statutes protect licensees, and a family lender isn't one. The MLA rule defines a creditor as a person "engaged in the business of extending consumer credit," so a one-time family loan usually falls outside it. Your note lives under your state's general usury law, and in Alabama that means 8% on a written note below $2,000. Illinois adds a wrinkle: the act defines a lender as "any person or entity" that offers or makes a loan, so read literally, a private Illinois lender making a consumer loan faces the same 36% limit. Check your rate with our usury limit checker before anyone signs a note.
Sources
Sarah McCullen is a writer covering personal finance, lending agreements, and everyday legal documents. Sarah transforms complex promissory note terms into clear, practical guidance so individuals can create and understand agreements without unnecessary confusion.
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