Interest Rates

AuthorRichard Leiter
Pages45-57

Page 45

Every state has very specific limits on the amount of interest that may be charged on consumer contracts, ranging anywhere from five to 15 percent. But because parties may always agree to interest rates that are above the legal limit, most consumer contracts include interest rates that are above that limit.

Thus few states have limits on what can be expressly agreed to in a contract. For example, Alaska limits express contract terms to five percent over the legal rate, while the District of Columbia has the highest stated ceiling, at 24 percent. A number of states allow the limit to be pegged to the rate set by the Federal Reserve Board; most of these states have limits of five percent above the Federal Reserve. Potentially, these may be much higher than the District of Columbia’s 24 percent. Overall, it appears that the more rural the state, the lower the limits. Presumably, farmers are protected and are more secure with lower interest rates than citizens of generally urban states with larger economies.

Usury is an unconscionable and exorbitant rate or amount of interest which exceeds those permitted by law. There is a great variety of statutory remedies for usury. A few states class usury as a crime and prescribe prison for violations of its usury laws. The majority of states provide for economic remedies such as forfeiture of all interest paid, recovery of double the usurious amount, payment of a fine, or making the contract unenforceable. Some states even specify that banks or savings and loans pay penalties. North Dakota has one of the more extreme usury penalties: it requires payment of all interest plus 25 percent of the principal.

For the most part there are myriad exceptions to the legal interest rate, which may be tied to the character of the lender, borrower, loan amount, the nature of the contract, or the matter that is the subject of the contract. Effectively, legal interest rates are no more than general guidelines for all transactions rather than the specific limits placed on them. There are so many exceptions in many states that it is often necessary to find a different rate for every conceivable situation.

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Table 4: Interest Rates
State Legal Maximum Rate of Interest Usury Penalty Judgments Exceptions
ALABAMA If agreed upon in writing, up to 8% per year, otherwise 6% per year (§8-8-1) Forfeiture of all interest and interest paid deducted from principal (§8-8-12) Other than costs, dollar judgments bear interest from date of entry at 12%; judgment on contract action bears interest at rate in contract (§8-8-10) Loans over $2000 (§8-8-5); debts under National Housing Act. Veterans’ Benefits acts (§8-8-6); industrial development boards and medical clinic boards (§11-54-97, 11-58-15); bonds issued by public or non-profit organizations (§8-8-7); public housing bonds, State Board of Education Securities (§§24-1-32; 16-3-28); public hospital corporations (§22-21-6)
ALASKA Absent contract: 10.5%; express contract agreement: 5% over legal rate (§45.45.010) One paying usurious interest may recover double amount thereof within 2 years (§45.45.030) 3% above 12th Federal Reserve District’s discount rate on January 2nd of year in which judgment is entered, unless contract action, then use contract rate (§09.30.070) Contract where principal amount exceeds $25,000 (§45.45.010)(b)
ARIZONA 10% per year; any rate may be agreed and contracted upon (§44-1201) Forfeit all interest (§44-1202); usurious payments deemed to be made toward principal; if payments exceed principal, judgment may be given in favor of debtor with interest at rate of 10% (§§44-1203, 1204) At allowable rate or as agreed upon as long as not in excess of that permitted by law (§44-1201)
ARKANSAS Consumer and nonconsumer rate is 5% above Federal Reserve discount rate (consumer rate is capped at 17%) (Const. Art. XIX §13) Contracts calling for more than lawful rate are void as to unpaid interest and debtor may recover twice amount of interest paid (Const. Art. XIX §13) Rate of interest for contracts in which no rate of interest is agreed upon shall be 6% per annum. (Const. Art. XIX §13)

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State Legal Maximum Rate of Interest Usury Penalty Judgments Exceptions
CALIFORNIA Loan/forbearance of any money, goods, or things in action, or accounts after demand—7% or contract rate (Const. XV §1) contract rate shall not exceed 12% (Civil Code §1916-1) Contract or agreement for greater than 12% shall be null and void as to any agreement to pay interest (Civil Code §1916-2); debtor may recover treble amount paid; willful violation—guilty of loan-sharking, a felony and punishable by imprisonment in state prison for not more than 5 yrs. or county jail for not more than 1 yr. (Civil Code §1916-3) Set by legislature at not over 10% rate; in absence of setting of such rate, rate of interest is 7% (Const. Art. XV §1) Incorporated insurer (Ins. §1100.1); licensed broker-deals (Corp. §25211.5); indebtedness issued pursuant to corporate securities law (Corp. §25116); licensed business and industrial development corporation (Fin. §31410); state and national banks acting as trustees (Fin. §1504); foreign banks (Fin. §1716); bank holding companies (Fin. §3707); state and federal savings and loans (Fin. §7675)
COLORADO 8% (§5-12-101); maximum rate that may be contracted for is 45% (§5-12-103); interest on consumer loan may not exceed 12% unless made by supervised lender (§5-2-201) Criminal penalty for knowingly exceeding 45%, Class 6 felony (§18-15-104) 8% if none specified in contract; if contract rate is variable, then at rate on day of judgment (§5-12-102[4]) Savings and loans (§11-41-115); mortgages (§5-13-101); business and agricultural loans (§5-13-102); small business loans (§5-13-103)
CONNECTICUT 12% (§37-4) Loan is not enforceable (§36a-573) Absent agreement to contrary, 8% (§37-1) Loans before September 12, 1911; bank; savings and loan; credit union; certain mortgages; loan for motor vehicle; boat; loan for higher education (§37-9); pawnbroker and loan broker (§21-44)
DELAWARE 5% over Federal Reserve discount rate; same maximum rate even if agreed upon in writing (Tit. 6 §2301) Debtor not required to pay excess over legal rate; if whole debt is paid with interest over legal rate, debtor may recover 3 times amount of excess interest or $500, whichever is greater, if action brought within 1 year (Tit. 6 §2304[b] 5% over Federal Reserve discount rate; same maximum rate even if agreed upon in writing (Tit. 6 §2301) No limit where loan exceeds $100,000 and is not secured by mortgage on borrower’s personal residence (Tit.6§2301(c))

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State Legal Maximum Rate of Interest Usury Penalty Judgments Exceptions
DISTRICT OF COLUMBIA In absence of agreement: 6%/yr. (§28-3302); by contract in writing: Up to 24% (§28-3301) Forfeiture of interest; usurious interest paid may be recovered (§28-3303; 3304) 4% allowed on judgments against the District of Columbia, its officers, employees acting within scope of employment; where judgment is not against District of Columbia, its officers, or its employees acting within scope of employment or where interest is not fixed by contract the rate of interest shall be 70% of the rate set by the Secretary of Treasury (§28-3302, 26 USC §6621) Federally insured bank or savings and loan and on direct motor vehicle installment loans (§§28-3308; 28-3601 to 3602)
FLORIDA Determined by comptroller of state by averaging the discount rate of the Federal Reserve Bank of New York for the preceding year and adding 500 basis points to the averaged federal discount rate (§55.03) All interest forfeited and repaid double (§687.04); criminal usury: credit at rate of 25-45% is misdemeanor with penalty of up to 60 days in prison and/or $500 fine; over 45% is 3rd degree felony; keeping the books/ records for loan at 25% is 1st degree misdemeanor, and if loan or forbearance is criminal, debt is not enforceable
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