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Many people rely on loans, but not everyone is aware of the limits of borrowing or lending money. All states have differing laws and limitations for loans, so for the purpose of this article the California Constitution will serve as the main resource. Usury is one of the main concerns when loaning money or taking out a loan. Usury is defined, in Article 15 of the California Constitution, as the charging of interest on a loan that exceeds what is stated in the law. In California the general rate for a loan is 7% per annum, followed by 10% per annum on loans intended for personal and household purposes. Other loans also have a rate of 10% per annum or 5% per annum plus a rate established by the Federal Reserve Bank of San Francisco.
Unless listed as exempt from this law, no lender can charge more than 10% per annum on a loan. Usury laws aim to protect all parties involved; however, in some instances there are exemptions to the law. Firstly, usury limitations do not apply to many large lending groups, like credit unions or banks. Secondly, loans for home purchase or renovation do not fall under usury law. And lastly, limits do not apply to a real estate broker if the loan is secured by real estate. There are grave consequences for usury for lenders. In many cases the borrowers affected by the usurious loans can gain back much of what they lost in the usurious interest, or more. If caught originating a loan deemed usurious, lenders may have all interest nullified or the court may decide to award the borrower treble damages or triple the amount of interest. Treble damages can be awarded by the court when a party has knowingly and intentionally charged an excessive interest rate, knowing it was illegal. However, once a loan is deemed usurious the lenders are still owed the principal amount on the loan, or however much there is left to pay off.
Both lenders and borrowers can unknowingly fall into usurious loan agreements, although lenders are more commonly caught originating usurious loans. Committing usury can lead to financial damages, legal costs and potential criminal liability. To avoid the repercussions of a poor loan agreement, it is recommended to seek out representation of an attorney to facilitate the transaction. By hiring a professional to draw up the promissory note and monitor the agreed-upon interest rate, the loan agreement will be limited under usury law protecting all parties involved.
JAHANGIRI LAW GROUP specializes in business, corporate, commercial and real estate litigation and transactional law. We are located in San Ramon. We are open from 9:00 a.m. to 5 p.m., Monday to Friday. To make an appointment please call 925-574-0100.
Sources
California Const. art XV. – usury law
Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 798. – usury
Teichner v. Klassman (1966) 240 Cal.App.2d 514, 524. – principal amount
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