Interest and usury both refer to a profit on loans, but there is a difference. Interest is perceived as a common business action while usury has a bad reputation. The two terms have roots in biblical scripture as well as law. Both provide an understanding of what these words have in common and what makes them different. In general, interest is a fee for for borrowing money and usury is excessive interest.
Historically, it was thought to be immoral to charge a poor person for the use of funds. The biblical meaning of the words "interest" and "usury" have always been negative. Originally forbidden by Catholic canon law, profit from lending money was legalized after the Protestant Reformation. At that time, interest and usury meant the same thing; they were both considered bad with respect to charging the poor.
The first use of the term usury in Old English Law referred to any form of compensation. As history unfolded, so did the different versions of the Bible. The King James Bible preferred "usury." Protestantism preferred "interest." Usury eventually became viewed as an immoral action conducted by immoral people. As the demand for credit increased, the meaning was modified, and in 1545 a legal maximum rate of interest was set.
Interest was originally meant to describe a single payment made to the creditor for the damage made to the creditor's good standing. At some point, the payment of interest turned into a legal term meaning the payments made over time to help guard against the risk of default. The former meaning referred to a payment made once a loan had defaulted; the latter meaning is an additional amount attached to each principal payment.
Interest in modern times is characterized as a fee to guard against the risk of default if the loan does not get paid back. Sometimes interest is waived for people with excellent credit, but in most cases lenders will charge interest for the use of funds that is equal to their cost of capital. This amount is calculated by the lender. Most states make it illegal to charge interest over a certain amount. Any amount over and above the statutory amount can be considered usury in that jurisdiction.
Sharon Barstow started her career in investment banking and then crossed over to the world of corporate finance as a financial analyst. She specializes in banking and corporate finance topics to include treasury management, financial analysis, financial statement analysis, corporate finance and FP&A. In addition to writing, she is the co-owner of a small dog bakery in rural Ohio.