You May Be Committing Usury Without Knowing It
You have money to loan, and you want to find a way to make more. You find a business that needs some money, and you like that business. You set up a deal where you loan money, and in return, the business pays you significant interest.
You’re not a loan shark, and not looking to commit usury, but you want a return on your money. In fact, most problems with usury laws come from well-intentioned people who innocently miscalculate interest on their loans. So how much interest can you legally get?
Legally, you can charge no more than 18% for loans up to $500,000, and 25% for loans that go above that amount. Interest above 25% is actually a misdemeanor up to 45%, when it becomes a felony.
As such, you think that you are avoiding usury by charging 18%–the max you can charge, assuming you are lending less than $500,000. The problem is that many transactions have other fees built into them—late fees, origination fees, penalties, points, and other charges that may be charged at the loan’s origination or during its lifetime. Those fees can be spread out over the life of the loan, and included as interest.
Practically, that means that your 18% interest rate just went up, when $5,000 worth of origination fees are calculated as interest, and your loan is now potentially usurious.
Usury is calculated on a 365-day year. But for ease of calculation, many contracts stipulate that interest is based on a 360-day year. If you charge 18% based on 360 days, under the usury laws, your loan is usurious when you add in the extra 5 days.
Compounding and Late Fees
Compounding, or charging “interest on interest” can create problems as well. This is where you are charging interest in month 1, then the next month you charge interest on month 1, and month 1’s interest (and so on for every month after that). You may think you are only charging 18% interest, but when interest is charged on interest, the total interest actually paid may exceed the legal limits.
Late fees are legally not interest, but that’s only if there’s 1 late fee assessed per payment. An agreement cannot say, for example, that a payment will be assessed a late fee every month that it is late.
Late fees also cannot continue when a loan has been accelerated. Of course, interest can be assessed after acceleration, but many lenders mistakenly continue to charge late fees even after acceleration.
Whether an agreement is usurious or not will be determined by the parties’ intent when the agreement is made. That means that a lender can’t alter interest terms in an agreement after it’s signed or voluntarily take less interest to “fix” a usury problem in order to avoid usury.
If you are lending money, be very wary of terms that can make your loan usurious. The penalty, aside from possible criminal penalties, could be a complete waiver of all amounts due, and a requirement that the borrower be paid back all usurious amounts paid under the agreement.
Make sure your business agreements are legal and safe. Contact Tampa estate and business attorney David Toback to discuss reviewing your business’ documents.