Usury is the charging of excessive interest on a debt. The broad definition of usury in California is contained in Article XV of the state constitution. However, several other California laws exempt a wide variety of businesses and debts from the usury limits. When the usury laws apply in California, there is no single maximum interest rate allowed. Instead, the maximum rate is based on the type of loan.
Loans to be used primarily for personal, family or household use are subject to a 10 percent interest rate limit. This rate is calculated based upon the amount of the unpaid debt. Thus, for a loan of $10,000, the maximum amount charged in interest can be $1,000. If payments are made on the debt, the amount of total interest can be significantly lower.
If a loan is to be used to purchase or improve a house, it is subject to a different set of criteria. The applicable rate limit is either 10 percent, or 5 percent plus the San Francisco Federal Reserve Bank's interest rate to member banks on the 25th day of the previous month, whichever is greater. As with family loans, the maximum allowable interest rate is always calculated against the outstanding balance.
Section 1916 of the California Civil Code contains default interest rate provisions that apply to any loan contract that does not contain full terms of repayment. Under these statutory provisions, interest rates cannot increase by more than 0.25 percent in any single increase, and they can increase only once every six months. Even with acceptable increases, the maximum interest rate is capped at 2.5 percent above the rate for the first payment due after closing the loan.
Revolving lines of credit, retail installment contracts and other time payment contracts are not considered loans in California. Therefore, they are not subject to the usury laws and the maximum interest rate limits. According to the state attorney general, credit cards fall into this category, so there are no limits on the finance charges that can be assessed, even if the credit is used to purchase of personal, family and household goods or services. However, the restrictions on contracts, apply unless expressly contradicted by the terms of a credit agreement.
Under various other California legal codes, several types of businesses and debt are exempt from the Article XV usury limits. These include incorporated insurers, licensed broker-dealers, state and national banks acting as trustees or savings and loans, bank holding companies, foreign banks, and licensed business and industrial development corporations. Licensed real estate brokers are also exempt from the usury laws limiting interest rates on loans secured by real estate, whether or not the lender acted in the capacity of a broker.
Under the California civil code, a debtor can receive back triple the amount he paid to an usurious lender. Willful violation of the usury limits on interest rates constitutes loan-sharking and is a felony punishable by up to five years in state prison or a year in county jail. An interest rate exceeding 12 percent in a loan contract subject to the usury laws makes the entire obligation of the debtor to pay any interest null and void.