What Is the Highest Legal Interest Rate on a Personal Loan?

Before you take out a personal loan, you should understand its interest rate. After all, the rate you receive will impact your overall cost of borrowing. Ideally, you’d choose the loan with the lowest rate. A lower rate can save you hundreds or even thousands of dollars in interest. 

On the other hand, a sky-high interest rate can make it difficult to repay the loan and potentially steer you into a cycle of debt. If you’re asking yourself, “What is the highest legal interest rate on a personal loan,” keep reading to find out.

What is the highest legal interest rate on a personal loan?

No federal law puts a cap on interest rates for personal loans. The highest legal rate on a personal loan depends on your state. It’s based on a concept known as an usury law, which prevents lenders from making loan offers with incredibly exorbitant interest rates that can take a serious toll on a borrower’s finances. 

You should know that state usury laws apply to traditional personal loans, not payday loans, which typically offer smaller amounts and shorter terms. In most cases, payday loan lenders are exempt from these laws and abide by deferred deposit transaction laws instead. 

Truth in Lending Act (TILA)

The Truth in Lending Act (TILA), does not set any caps on personal loan interest rates. It’s designed to protect borrowers from predatory lending practices. 

Per the TILA, lenders must disclose all important information about their loans, including interest charges. This way, consumers can make informed decisions about the loans and credit cards they take out. 

While the TILA won’t necessarily prevent lenders from charging excessively high interest rates, it does force them to be more transparent about their loan terms and fees. It can also help you become a smarter borrower and protect you against deceitful lending practices. 

The Military Lending Act

Implemented by the Department of Defense, the Military Lending Act protects active service members and their dependents from predatory lending practices. It’s the only federal law that puts a limit on interest rates. According to the Military Lending Act, the interest rates offered to military personnel can be no more than 36%. 

Most consumer loans are covered under this act, including personal loans, vehicle title loans, lines of credit, payday loans, and tax refund loans. Loans, such as residential mortgages, home equity loans, home equity lines of credit (HELOCs), and business loans, however, are excluded. 

The primary goal of the Military Lending Act is to protect the finances of military service members and their families. Without it, they may face costly interest charges they cannot repay. 

What is the maximum legal interest rate for personal loans in your state? 

Usury laws are state-specific laws that set a maximum legal interest rate for personal loans in each state. Before you proceed with a loan, it’s a good idea to familiarize yourself with the laws in your state. 

If you find that the interest rate you receive exceeds the usury limit in your state, you should look elsewhere for a loan. If you are already committed to the loan, you can cancel it. Lenders who ignore usury laws and charge more than the legal limit in their state may face hefty fees and jail time.

Below is a list of the annual maximum legal interest rate for undocumented loans in each state, as of March 2024. Remember that laws can change so you should always research and ensure you know the most current interest rate.

State	Maximum legal interest rate
Alabama	6%
Alaska	10.5%
Arizona	10%
Arkansas	17%
California	10%
Colorado	8%
Connecticut	12%
Delaware	5% over the Federal Reserve discount rate
District of Columbia	6%
Florida	18% for loans under $500,000 and 25% for loans $500,000 or more
Georgia	7%
Hawaii	10%
Idaho	12%
Illinois	9%
Indiana	21%
Iowa	5%
Kansas	10%
Kentucky	8%
Louisiana	12%
Maine	6%
Maryland	6%
Massachusetts	6%
Michigan	5%
Minnesota	6%
Mississippi	8%
Missouri	9%
Montana	15% by written agreement or 6% above the Federal Reserve’s prime rate
Nebraska	16%
Nevada	2% plus the Nevada Prime Rate
New Hampshire	10%
New Jersey	6%
New Mexico	15%
New York	6%
North Carolina	8%
North Dakota	6%
Ohio	8%
Oklahoma	6%
Oregon	9%
Pennsylvania	6%
Rhode Island	12%
South Carolina	8¾%
South Dakota	15%
Tennessee	10%
Texas	6%
Utah	10%
Vermont	12%
Virginia	8%
Washington	12%
West Virginia	6%
Wisconsin	8%
Wyoming	7%

Ask the expert

Natalie Slagle

CFP®

If you don’t qualify for a low enough interest rate on a personal loan, evaluate if you truly need the loan. It may be better to wait and save for the intended purpose of the loan. If the rate is high due to a low credit score, it may be in your best interest to understand why your credit is low and improve it. This could potentially lead to getting better interest rates in the future.

What to do with a high-interest loan 

The reality is that high-interest loans can significantly hinder your finances, especially if they include large borrowing amounts and lengthy terms. If you find yourself in a situation with a high interest, don’t fret. These tips may improve your situation. 

Create a budget

It can be a real challenge to pay back a high-interest loan if you don’t have a set budget. With a budget, you’ll know exactly where your money goes every month and be able to make room for your expenses, debts, and savings goals. 

While there are many budget options, some of the most popular ones you might want to look into include the 50/20/30 and zero-based budgets.

Reduce your spending 

If you’re struggling to repay your loan, closely examine your budget. Ask yourself if you can cut back on any expenses. Maybe you pay for a gym membership you don’t use. Or perhaps you dine out frequently and can eat at home. Once you lower your spending, you’ll have more money to repay your high-interest loan.

Increase your income

Even if you have a full-time job or another regular source of income, you might not earn enough to repay your high-interest loan. If possible, look for ways to make more money. You can pick up a side hustle, like babysitting or delivering groceries. 

Another option is to sell unwanted items online or find a part-time job for the evenings or weekends. Remember that you can always quit after you pay back your loan.

Reach out to your lender

Don’t hesitate to contact your lender to explain your situation and find out if they can assist you. Fortunately, some lenders offer hardship programs that can lead to paused or reduced monthly payments. 

You might also be able to negotiate your balance, especially if you’ve been a long-time customer and developed a good relationship with your lender. 

Refinance your loan

You may be able to refinance your high-interest loan depending on your situation. This is when you replace your existing loan with a new loan, ideally with a lower interest rate. However, read the loan agreement carefully before you sign on the dotted line. Make sure the fees and rate are lower than what you’re currently paying, or refinancing may not be worth it.

Check the lender’s licensing

While national banks aren’t required to have a state license, most other lenders are required to hold one. Find out if the lender is licensed in your state. If not, you might not have to repay your loan. 

If you are in this situation, you might want to consult an attorney to double-check your rights before you stop making payments. You should also report the lender to the attorney general in your state and the Consumer Financial Protection Bureau (CFPB).

Ask for help

If you’ve exhausted all other options, you may want to look for local charities and non-profit organizations that can help you cover the cost of some or all of the loan. You can also turn to a credit counseling agency or a trustworthy friend or family member to get back on your feet.