Usury is the charging of interest in excess of that allowed
by law.
Usury laws are complicated and there are many exceptions
to the general rules. Listed below are some of those general
rules. Since there are exceptions, and the penalties for
violating usury laws are severe, individuals making loans for
which there are interest charges should contact an attorney for
further guidance.
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. As with all other
percentages we are listing, this percentage is based on the
unpaid balance. For example, if a loan of $1,000 is to be paid
at the end of one year and there are no payments during the year,
the lender could charge $100 (10%) as interest. However, if
payments are to be made during the year, the maximum charge
allowed could be much less.
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 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 (if the agreement to
loan and the actual lending of the money are in different months,
the 25th day of the month before the earlier event is used).
The usury laws do not apply to any real estate broker if the
loan is secured by real estate. This applies whether or not he
or she is acting as a real estate broker. The limitations also
do not apply to most lending institutions such as banks, credit
unions, finance companies, pawn brokers, etc. State laws place
limitations on some of these loans, but at a higher percentage
rate than the usury laws listed above.
Time payment contracts (for example: retail installment
contracts and revolving accounts) are not generally regarded as
loans. The usury laws normally do not apply to them. There are
no limits on finance charges for the purchase of personal, family
and household goods or services at this time. The maximum rate
of interest for automobile loans is almost 22%. Banks take the
position that the charge for third party credit cards (Visa,
MasterCard, American Express, etc.) are not subject to these
limitations.
In transactions for the purchase of goods or services which
are not for personal, family or household purposes, there are
normally no limits to finance charges except those set by the
parties.
In the absence of an agreement, the rate of interest upon a
loan or forbearance (an agreement not to collect until later for
money already owed) of any money or goods or accounts (after
demand) is 7% per year.
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