Usury widely differ from state to state. Under the California Constitution parties to contract for interest on a loan primarily for personal, family or household purposes may not charge an interest rate in excess 10% simple interest annually, on an unpaid balance. Absent a written agreement, the rate of interest upon a loan or of any money or goods or accounts after demand is limited to 7% simple annual interest.
Proceeds of a loan obtained primarily for the purchase or improvement of a home, are not considered a loan for personal, family or household purposes. For these loans, and any other loans not for personal, family or household purposes, the permissible interest rate is the greater of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan, whichever is greater.
California usury laws do not apply to real estate brokers for loans secured by real estate, whether or not the brokers are acting in the capacity of a real estate broker when the loan is made. Most lending institutions – banks, credit unions, and finance companies – are not subject to the 10% interest limitation. There are statutory interest rate limits for some of these loans, but they are at a higher percentage rate.
Violation of the usury law prohibits the Lender from recovering any further interest and may also require disgorgement of previously paid interest. The Lender may also be liable for treble and punitive damages and a civil penalty of $2,500 per violation. A willful violation may be punishable by a fine of up to $10,000 and imprisonment for up to one year.
Should your business lend money and require repayment with interest, or charge interest on unpaid balances, talk with your attorney. Make sure, before you demand interest that your interest rate is enforceable and not usurious.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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