How Lenders Get In Trouble With Usury Laws

Let’s say you loan money to borrowers. You know that you can charge interest, but that there is a limit to the legal interest that you can charge. You are careful, making sure not to exceed the legal maximum. But don’t be surprised if you still end up in trouble, exceeding the legal interest rate—and getting you in trouble for usury.

What is Usury?

Usury is simply charging more than the legal interest rate that can legally be charged. You don’t have to be a gangster, mobster, or some loan shark, to break usury rules. Anybody who loans money can end up violating usury laws.

If you are loaning less than $500,000, the maximum interest that you can charge is capped at 18%. Above that dollar figure, interest rates can go to 25% yearly. But the calculation of your interest in order to remain under those legal limits is a bit more complex than just multiplying the amount borrowed by .18 or .25, to make sure you’re in the legal limits.

All Charges Count

The first thing to remember is that in many cases, courts have interpreted any fee, charge, or expense, as “interest.” So, for example, if you loan out $100,000, charge exactly 18% interest, but you also have late fees, and a loan origination charge, those late fees and origination charges are going to put you above the 18%, making your loan usurious.

It doesn’t matter whether you call those extra charges interest in your loan agreement or contract or not; courts will look at what they are, not what you call them.

Compound Interest

Compound interest creates real problems as well, because courts will just take the total yearly interest charged to the borrower to calculate yearly interest. When you use compound interest (that is, interest charged on interest), you can very quickly exceed the maximum legal interest rate.

Choices of Laws of Other States

You do have the option of including a choice of law provision, choosing the law of a state that has a higher interest rate maximum than Florida does. But then you are subjecting yourself to all of those other states’ laws—even ones that may make it hard for you to enforce the agreement in other ways.

Investment or Loan?

One way that many people who loan money try to skirt usury laws, is by calling the money loaned, an “investment.” There is no interest on an investment, and thus, no maximum rate.

But again, courts don’t care what you call the money-courts will look to traditional markers of loans. Regular payments, late payments, closed-end terms, or mandatory repayment schedules, are all indicative of a loan, not an investment, and sometimes courts will call your “investment” a loan, thus making your extra fees, interest and charges usurious.

Do you have a contract that needs enforcement? Let us help.  Call the West Palm Beach business lawyers at The Law Offices of Larry E. Bray today.

Sources:

resources.additionfi.com/usury-laws

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0687/Sections/0687.02.html