Yes, interest rates are different by state, and the reason has two layers. Each state sets its own usury cap, the legal ceiling on what a lender can charge, and those caps vary from single digits to effectively no limit at all. On top of that, federal law lets banks charge the interest rate allowed by the state where the bank is chartered, not the state where you live. So the rate on your loan may reflect a state you have never set foot in.
State Usury Caps Set the Baseline
Every state has a usury law that caps interest before a loan is considered illegally expensive. Some states set general limits as low as 6 percent for ordinary personal loans. Others allow much higher rates or exempt whole categories of lending. A couple of states impose no meaningful cap at all on larger loans. A loan that is perfectly legal in one state could violate the law a few miles across the border.
These caps apply most directly to state-chartered banks and to nonbank lenders that have to be licensed in each state where they do business. A finance company that wants to lend in multiple states needs a separate license from each one, and each license binds the company to that state’s rules.
Why Your Bank’s Rate Ignores Your State’s Cap
National banks work differently. Under federal law, a nationally chartered bank can charge interest at the rate allowed by the state where the bank itself is located, or at 1 percent above the Federal Reserve’s discount rate on ninety-day commercial paper, whichever is greater.1Office of the Law Revision Counsel. 12 U.S.C. 85 – Rate of Interest on Loans, Discounts and Purchases If the bank is chartered in a state with a high ceiling, it charges that rate to customers everywhere, regardless of the borrower’s home state.
The Supreme Court cemented this framework in 1978 in Marquette National Bank v. First of Omaha Service Corp. The Court held that a national bank headquartered in Nebraska could charge Nebraska’s interest rate to credit card customers in Minnesota, even though Minnesota’s cap was lower.2Justia Law. Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978) The bank was “located” where it was chartered, not where its customers lived. The industry calls this “rate exportation”: a bank can export its home-state rate to borrowers in every other state.
After Marquette, major credit card issuers chartered or relocated to states with high or nonexistent ceilings. That is why you can live in a state with a strict cap and still hold a credit card charging well above it. The issuer is chartered in a state that allows the rate, and federal law lets the bank apply that rate to you.
State-Chartered Banks Got the Same Power
In 1980, Congress extended rate exportation to state-chartered banks through the Depository Institutions Deregulation and Monetary Control Act. The provision, codified at 12 U.S.C. ยง 1831d, allows any FDIC-insured state-chartered bank to charge interest at the rate permitted by its home state, overriding the usury laws of the borrower’s state.3Office of the Law Revision Counsel. 12 U.S.C. 1831d – State-Chartered Insured Depository Institutions and Insured Branches of Foreign Banks Congress passed it so state-chartered banks would not be at a disadvantage against their nationally chartered rivals.
The result is a kind of uniformity at the top of the market. Any large bank, federally or state chartered, can effectively opt out of a strict state’s rate cap by choosing the right home state. The differences in what you actually pay show up more clearly among smaller lenders that operate under a single state’s rules.
Federal Credit Unions Have a Different Ceiling
Federal credit unions do not follow the exportation framework. Under the Federal Credit Union Act, the default ceiling on member loans is 15 percent per year.4Office of the Law Revision Counsel. 12 U.S.C. 1757 – Powers The National Credit Union Administration Board can temporarily raise it when market conditions warrant, and it has done so repeatedly. The current temporary ceiling is 18 percent, extended through September 2027. For payday alternative loans, federal credit unions can charge up to 28 percent.5National Credit Union Administration. Permissible Loan Interest Rate Ceiling Extended
These limits sit well below what most banks can charge. That is one reason credit union loan rates tend to be cheaper. Credit unions also come with membership requirements and fewer product options.
The Type of Loan Changes the Rate
Even within a single state and a single lender, different categories of credit carry different caps. A state might limit general personal loans to a single-digit rate while allowing licensed payday lenders to charge fees that translate to annual percentage rates above 300 percent on a two-week advance. Most states that permit payday lending set fees at $10 to $20 per $100 borrowed, which looks modest until you annualize a two-week loan.
The variation is deliberate. State legislatures write separate statutes for mortgages, auto financing, credit cards, and small-dollar loans because each product has different risk and servicing costs. Roughly 45 states cap rates on at least some categories of consumer installment loans, but the specific thresholds and exemptions differ widely by product.
Mortgages Are Largely Exempt From State Caps
Home loans sit outside this whole framework. Under regulations implementing the Depository Institutions Deregulation and Monetary Control Act, state usury limits are preempted entirely for federally related first mortgages made after March 31, 1980. The regulation is explicit that it does not matter whether the state limit is criminal or civil in nature, because the federal statute preempts any state law imposing a ceiling on first-mortgage interest.6eCFR. 12 CFR Part 190 – Preemption of State Usury Laws Mortgage rates are set by market forces, lender competition, and your credit profile rather than by your state’s cap.
Military Borrowers Get Federal Caps That Override the Rest
Two federal laws create hard interest ceilings for military servicemembers that override state rules and lender charter types alike.
The Servicemembers Civil Relief Act caps interest at 6 percent per year on debts a servicemember took out before entering active duty. The lender must forgive any interest above that threshold for the duration of service. For mortgage obligations, the cap extends for an additional year after service ends.7Office of the Law Revision Counsel. 50 U.S.C. 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service The protection also covers joint loans with a spouse, and the forgiven interest cannot be tacked on later.8U.S. Department of Justice. Your Rights as a Servicemember: 6% Interest Rate Cap for Servicemembers on Pre-service Debts
The Military Lending Act covers new borrowing. It prohibits any creditor from charging more than a 36 percent Military Annual Percentage Rate on consumer credit extended to active-duty servicemembers and their dependents.9Office of the Law Revision Counsel. 10 U.S.C. 987 – Terms of Consumer Credit Extended to Members and Dependents: Limitations The 36 percent figure includes interest, finance charges, credit insurance premiums, and most fees associated with the loan. The MLA covers credit cards, payday loans, vehicle title loans, and most installment loans. It excludes standard auto purchase loans and most home mortgages.10Consumer Financial Protection Bureau. Military Lending Act (MLA)
Fintech Partnerships Complicate the Picture
Rate exportation works cleanly when a bank originates and holds a loan. It gets murkier when a bank partners with a financial technology company. In a typical arrangement, the bank technically originates the loan at its home-state rate, then sells it to a fintech partner that services the account and bears the economic risk. State regulators have questioned whether the bank is really the lender at all, or just renting its charter so the fintech company can avoid state usury caps.
Courts examining these partnerships look at who bears the risk of default, who controls underwriting, who services the loans, and who keeps the profits. In one widely cited case, the non-bank partner serviced the loans, bore all default risk, paid all legal expenses, retained 99 percent of the profits, and indemnified the bank against every claim. On facts like those, a court may conclude the bank is the lender in name only, stripping away the preemption shield and subjecting the loan to the borrower’s home-state cap.
A related question came up in the Second Circuit’s Madden v. Midland Funding decision: when a national bank sells a loan to a non-bank debt buyer, does the buyer inherit the bank’s preemption? The court said no. If the debt buyer owns the loan outright and collects interest on its own behalf, state usury law applies, because applying that law would not significantly interfere with any national bank power. For borrowers, the practical effect is that a loan arranged through a bank-fintech partnership may carry a rate your state would otherwise prohibit, and whether that rate is legally enforceable depends on contractual details you will not see. The law here remains genuinely unsettled.
What Happens When a Lender Exceeds Its Allowed Rate
Penalties depend on the state and the charter, but they are serious enough that legitimate lenders pay attention. Common civil penalties at the state level include forfeiture of all interest on the loan, leaving the lender able to recover only principal. Some states let borrowers sue to recover double the excess interest they paid.
On the federal side, when a national bank knowingly charges more than its permitted rate, it forfeits all interest the loan carries, and a borrower who already paid the excess can sue to recover twice that amount within two years.11Office of the Law Revision Counsel. 12 U.S.C. 86 – Usurious Interest; Penalty for Taking; Limitations The rule for FDIC-insured state-chartered banks mirrors that structure: forfeiture of interest and a two-year window to recover double the excess.3Office of the Law Revision Counsel. 12 U.S.C. 1831d – State-Chartered Insured Depository Institutions and Insured Branches of Foreign Banks Several states go further and treat extreme overcharges as criminal offenses, with misdemeanor or felony exposure depending on how far above the ceiling the rate goes and whether the lending was part of a pattern.
If you think a lender has charged you a rate that violates the law, the first question to answer is which set of rules governs the loan: your state’s cap, the lender’s home-state cap under federal preemption, or one of the federal ceilings that applies regardless. That answer determines whether you have a claim and where to bring it.