Proscriptions against usury are found in diverse legal and religious traditions and predate the papacy. Why? Because usury is immoral. ALL legal systems invalidate agreements made under duress.

Your first argument, “We need to legalize it so we can regulate it” can be made against any illegal activity and doesn’t address the merits of the issue of usury.

Your second point is true enough.

Your third point has me scratching my head. Who is subsidized by a cap on interest rates?

I agree that entering into loans with usurious rates is self-destructive, but in the case of predatory loans education/term disclosure seems a more reasonable remedy.

In fact, I think the best libertarian argument to be made in favor of usurious loans is to promote the consumer protection model. Under such a scheme, payday and other usurious loans are legal when accompanied by a clear declaration of the terms of the loan and what practical effect the loan will have (this loan will have a term of 399 years. . .). Unfortunately, consumer protection models have become a joke–read any of the ‘disclosure’ notices from your bank/credit card company lately?

Harvard Law professor Elizabeth Warren writes eloquently on this and related topics.

If consumers are in such dire need of money that they’ll pay 28%, then it’s only reasonable to imagine that there are even *more* distressed borrowers that will pay even higher rates. Without the regulated, somewhat reputable pawnshop or payday loan provider, these people will end up on the black market with the mob. And instead of repossessing things or garnishing wages, they’ll have truly devastating social consequences — death and kidnapping.

Second, these interest caps are the first step back to Dark Ages papal usury laws. There’s a reason most credit card companies base operations in South Dakota — no usury law.

Third, the commenters that say capping the rate will avoid a vicious debt cycle have muddy thinking. A legal cap is an implicit subsidy, and will *encourage* more self-destructive borrowing, because the consumer won’t feel the true market price of outrageous borrowing, only a “reasonable two-digit cap.”