Lending Money? Watch Out for Usury Laws
If you are thinking of making money on the interest of money you loan out to others, you may be very profitable. However, when it comes to loaning money, the amount of interest you can charge—that is, the legal usury rate—is something you need to keep in mind, as the penalties for violating Florida’s usury laws can be severe.
Why do We have Usury Laws?
Usury comes from the olden days when loan sharks and underground lenders would lend money to desperate people that they knew could never pay back what was loaned because of the exorbitantly high interest rates that were charged. Loaning money was not a gradual, slow stream of interest-based income but rather a get rich quick strategy, where people desperate for loans could be taken advantage of.
But usury rates prevent this from happening. And despite its history of being associated with people who try to take advantage of others, most usury cases nowadays are from legitimate honest lenders, who simply don’t understand usury law, or miscalculate the amount of interest they are charging.
The Legal Interest Rates
The legal amount of interest that can be charged for a loan in Florida is 18% per year for loans up to $500,000. For loans greater than that amount, 25% is the maximum amount that can be charged. The criminal penalties are severe—committing usury can actually end up with your being charged with a felony.
Where people get into trouble is when they charge borrowers money not labeled “interest.” Usury laws don’t care what you label your charges—penalties, late fees, or other charges. As far as usury laws are concerned, money is interest
That means that if you carefully calculate your interest at an otherwise legal 17.99%, but then you charge late fees or penalties, your interest rate could now go to 18.01% (or more) – and you are committing a crime, in addition to civil penalties, which could require you pay back the money paid to you, plus damages (aside from the balance of the contract being unenforceable).
Other Errors in Interest Calculation
People also get into trouble with the number of days in the year. Obviously, we have a 365 day year—but many contracts will stipulate that interest is based on a 360 (or other number less than 365) day year. But if you calculate, for example, interest at 17.99% based on a 360 day year, but in reality the calendar year is 365 days, your actual interest rate is more than 17.99%, and could go above the legal 18%.
Compounding interest—charging “interest on interest” is another technique that gets people in trouble. Interest should only be charged on, and calculated on, the principal balance owed.
Usury is also based on intent at the time that an agreement is signed. That means that if you realize your contract is usurious, you can’t avoid problems by later waiving the right to interest that exceeds the maximum legal amount.
Call the West Palm Beach business litigation lawyers at Pike & Lustig to help with any contractual or commercial litigation problems that you may have.