Legal Rate Of Interest

See: Usury.

Usury laws (defining the maximum rate of interest that can be charged) are a state's rights thing, not a federal thing. Every state simply defines what that number is...and then lenders or members of that state must cap rates right there.

Why wouldn't you just let the market rule? Why not have rates be whatever the market will bear? Well, you can imagine desperate people, ignorant people, fraudulent people, doing all kinds of bad things to take advantage of a market that isn't all that easy to understand. Renting money is a tad more complex than buying a bunch of bananas. So states look out for their peeps, capping rates, and knowing that extremely high-risk would-be borrowers simply won't be able to borrow money, even if they're willing to pay 30% a year interest, because the laws in that state cap rates at 25%.

In a world of extremely competitive lending practices, however, if you have to be asking these questions about how high a rate a given individual or entity can borrow, something is clearly wrong with their credit or the risk profile, and there are probably a lot of other questions to be asked. Namely, "How'd they get to this bad place in the first place?"