Usury Issues

Article II of California’s Constitution sets limits on the amount of interest lenders can charge. Loans for personal, family, or household purposes cannot have an interest rate higher than 10 percent. Loans for home purchases and home improvement are capped at the greater of 10 percent or five percent over the Federal Reserve rate. There are exceptions for secured transactions, many licensed lending institutions, out of state lenders, and other loan types.

Under the law, usury is a black and white issue. A lender issuing a loan in excess of the maximum rate applicable to the transaction commits usury. When a lender commits usury, the borrower is entitled to a wide range of damages including a refund of all interest paid, the cancelation of future interest charges, damages equal to three times the interest paid during the preceding 12 months, and possible punitive damages.

Because of these costs and the complex rules regarding what loans usury laws apply to, lenders should take great care before entering into any loan agreement. A discussion with a California attorney experienced in usury and finance laws can be highly beneficial.