From time to time, every business will have a dispute, regardless of the business’s size, staffing or the nature of their business. These business disputes (and accompanying business litigation) can happen between the owners themselves, vendors, investors, contractors and, sometimes, disputes over interest rates can occur with lenders. These lenders could be banks, but often, entrepreneurs and closely held corporations seek loans from investors, private individuals or even other companies. And, it is in some of these transactions where the legality of a loan’s interest rate may start business litigation.
A history of usury
The term, “usury” now refers to illegally high interest rates charged on loans. Ironically, the term comes from time of King Henry VIII in England when the term only referred to the interest rate charged. Over time though, the term evolved to only refer to illegally high interest rates.
In California, there are usury laws, but there are many exceptions, which is why all business contracts should be analyzed by an independent lawyer or inhouse counsel. These exceptions allow certain people to skirt usury laws. These include most financial institutions, like banks, and real estate broker transactions secured by real property. And, if a loan contract is exempt, there is no interest rate limit.
Generally speaking, for monetary loans (and loans for goods and things), the maximum interest rate is either 7% or 12%. Any contract or agreement that has a higher interest rate that is not covered by an exception is unenforceable.
If a contract violates the California usury laws, the debtor may be able to recover three times the amount already paid on the contract (treble damages). And, if the San Diego, California, loan provider willfully violates usury laws, like in the case of loansharking, the penalty moves from civil to criminal. Loan sharks face a felony in our state that is punishable by up to 5 years in prison.