Loaning money with interest is legal in every U.S. state. What is regulated is how much interest you can charge, whether you have to be licensed to lend, and how the interest gets reported on your taxes. Cross the interest ceiling and the penalties fall on you as the lender, not on the borrower.
How Much Interest You Can Legally Charge
Every state has a usury law that caps the interest rate on consumer loans. The caps vary widely. For a typical consumer installment loan, the median state cap sits around 27% APR. Some states permit rates as high as 40% to 60% on certain products. Roughly a dozen states and the District of Columbia have adopted caps at or below 36%. A few states set no numerical ceiling at all and instead prohibit rates a court finds “unconscionable,” which is decided case by case.
The type of loan matters as much as the state. Mortgages, auto loans, credit cards, and small-dollar payday loans usually have their own rate rules within a single state, and many states treat commercial loans differently from consumer loans. A rate that is lawful for one product can violate the cap for another between the same parties.
Before you set a number, look up your own state’s cap for the specific kind of loan you’re making. That figure is the hard ceiling for a private lender.
Why Credit Card Rates Look Higher Than the Cap
If you’re eyeing a 24% credit card rate and wondering why that’s allowed in a state that caps interest at 12%, the short answer is that you can’t do what a national bank does. Federal law lets a nationally chartered bank charge interest at the rate permitted in the state where the bank is located, not where the borrower lives.1Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest Allowed The Supreme Court confirmed this in 1978, holding that a Nebraska bank could charge its out-of-state customers the rate Nebraska allowed.2Legal Information Institute. Marquette National Bank of Minneapolis v First of Omaha Service Corp
As an individual or an unchartered lender, that preemption doesn’t apply to you. Your state’s usury cap governs in full.
The Special 36% Cap for Servicemembers
One federal rate ceiling reaches across state lines. The Military Lending Act limits the military annual percentage rate to 36% on most consumer credit extended to active-duty servicemembers and their dependents, including credit cards, payday loans, vehicle title loans, and most installment loans.3Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents The MAPR calculation includes not only the stated interest but also finance charges, credit insurance premiums, and add-on fees.4Consumer Financial Protection Bureau. Military Lending Act (MLA)
The penalties are severe. A loan that exceeds the 36% MAPR is void from inception, so the borrower owes nothing. The lender faces minimum civil damages of $500 per violation plus potential punitive damages and attorney fees, and a knowing violation is a misdemeanor carrying up to a year in prison.3Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents
The IRS Rate Floor: Charging Too Little Is Also a Problem
State usury caps set a ceiling. The IRS effectively sets a floor. If you lend to a friend or relative at zero interest or a rate below the IRS’s Applicable Federal Rate, the IRS may treat the difference as a gift from you to the borrower and treat you as having received the interest anyway, taxable as income you never actually collected.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Two safe harbors soften the rule. Loans of $10,000 or less between individuals are completely exempt from the imputed interest rules, as long as the borrower doesn’t use the money to buy income-producing assets like stocks or rental property.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates For loans between $10,000 and $100,000, imputed interest is capped at the borrower’s actual net investment income for the year, and if that investment income is under $1,000, it’s treated as zero.
For April 2026, the Applicable Federal Rates are approximately 3.59% for short-term loans (three years or less), 3.82% for mid-term loans (three to nine years), and 4.62% for long-term loans (over nine years).6Internal Revenue Service. Rev. Rul. 2026-7 Applicable Federal Rates Charging at least the AFR for your loan term eliminates the imputed interest issue.
You Have to Report the Interest You Earn
Interest you collect on a personal loan is taxable income. You must report it on your federal return whether or not anyone sends you a Form 1099-INT.7Internal Revenue Service. Topic No. 403 – Interest Received Family and friend loans routinely miss this because no one thinks of the interest as investment income, but the IRS does.
When You Cross Into Needing a Lending License
Lending money once or twice to someone you know doesn’t require a license. The line shifts when lending starts to look like a business. Every state requires licensing for entities that regularly make consumer loans. The triggers vary: some states count the number of loans per year, others look at whether you advertise or charge fees beyond simple interest.
Repeated lending to multiple borrowers, advertising your willingness to lend, or charging fees that look like a lending business can trigger licensing requirements even if you think of yourself as just helping people out. Operating without a required license is itself a violation and can void the loans entirely.
What Happens If You Charge Too Much
The penalties for a usurious loan land on the lender. How hard depends on the state and the size of the overcharge.
- Interest forfeiture is the most common remedy. A court finds the rate usurious and the borrower owes only the original principal, with all interest wiped out. Many states also award the borrower double the interest already paid, plus attorney fees.
- In some states, and under the Military Lending Act, a usurious loan is void from inception. The lender loses the principal as well as the interest.
- Even short of formal voiding, a court may refuse to enforce an illegal loan agreement. A lender suing to collect on a usurious note can see the case dismissed.
- Some states treat extreme usury as a crime. Federal law also criminalizes extortionate lending, meaning threats or violence used to enforce repayment of high-interest loans.3Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents
Genuine math errors are usually treated more leniently. Most states allow a defense for bona fide computational mistakes, limiting the lender’s liability to returning the overcharged amount. That defense disappears when the lender knowingly set a rate above the legal limit.
A Practical Checklist for a Private Lender
If you’re an individual planning to lend money and charge interest, the framework is more forgiving than most people assume, but the details matter.
- Keep the rate at or below your state’s usury cap for the type of loan you’re making.
- Charge at least the IRS Applicable Federal Rate for your loan term to avoid imputed interest.
- If the borrower is an active-duty servicemember or a dependent, stay under a 36% MAPR and count fees toward that rate.
- Put the terms in writing: principal, interest rate, repayment schedule, and what happens on default. A loan running longer than a year without a written agreement can hit enforceability problems under most states’ statute of frauds.
- Report the interest you receive on your federal tax return, whether or not a 1099 is issued.
Loans under $10,000 give you the most room. The IRS won’t impute interest, and most states treat small personal loans as outside their licensing rules. Above that threshold, the tax rules tighten, and if you begin lending to multiple people on a regular basis, you approach the point where states require a lending license regardless of the amounts involved.