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The Cautionary Tale of Entering Into a Private Loan with High Interest

By October 3, 2012October 25th, 2018Business Blog, Iman Reza
Iman Reza

Iman Reza

In these difficult economic times, some are providing loans to distressed businesses and individuals at high interest rates. Based on a recent experience, I caution lenders to ensure their interest rates are legal. As you will see, there are some expensive pitfalls for breaking usury laws.

Usury is the charging of interest in excess of that allowed by law. In very general terms, interest should be at or below 10%[1]. But usury laws are complicated and there are many exceptions to the general rules.

We recently secured a judgment against a private lender for the collection of illegal interest. Our client made interest only payments upwards of 19% for accepting a sizeable business loan from a private lender. Our client paid the loan for many months and eventually realized that the interest charged was too high. The lender refused to reduce the interest or return the collected money and we filed suit. Although the lender gave its best effort, the court agreed that the loan did not fall within any of the usury exceptions. Based on our advocacy, our client was awarded the return of all his interest, attorney’s fees and costs.  The court also awarded treble damages pursuant to Civil Code §1916-3. They were computed by tripling the total interest paid by during the one year period before filing suit. Our client was delighted and the lender rattled.

Providing this high interest loan proved very costly for the lender. In order to avoid these possible pitfalls, I recommend you have private lending agreements drafted or thoroughly reviewed by a competent lawyer who understands California’s complicated usury laws. Lawyers at Cummins & White have experience drafting private lending agreements to ensure that this specific problem is avoided

[1] The California Constitution allows parties to contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding 10% per year. In regard to usury, a loan to be used primarily for home improvement or home purchase is not regarded as a loan for personal, family or household purposes. With these loans and for any other loans which are not for personal, family or household purposes, the allowable rate is the higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan. See Article 15 of the California Constitution.