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Loans, Interest and Usury: It’s Not as Easy as You Think

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If you are in the business of loaning money to other people, and you charge interest, you hopefully know about the maximum legal interest rate that you can charge. Go above that rate, and you’re not only breaking the law, but you could end up losing all the money that you borrowed—in addition to getting yourself sued.

What is a Loan?

Many businesses already know what the legal maximum interest rate is. But do you know what a loan actually is?

That sounds like a silly question, but not every “giving of money” is a loan. An investment, for example, that doesn’t have to be paid back unless someone else reaps a profit, is not a loan, and thus, interest cannot be calculated on an investment.

But be wary—simply calling money an “investment” or something similar, won’t make it that—courts will look to the nature of the transaction, and look to traditional hallmarks of a loan, to see if something is, in fact, a loan or an investment—and if it turns out it is the former, and the interest on the money is too high, you could find yourself with a usurious loan.

This has been a problem in the merchant factoring or merchant receivables factoring industries, where loans are made based and then paid back on a company’s daily revenue, if there is any. Courts have been divided on whether this is a loan or not, but some courts have said yes, and thus, found the loans to be usurious.

Interest is Interest No Matter What You Call It

The same goes with charges on the money loaned. Many people try to avoid usury, by avoiding the use of the word “interest.”

But courts don’t just look at language, and will interpret things like late fees, penalties, origination fees, servicing fees—whatever you want to call them—as interest. When you add all those extra “non interest” costs and fees up, you can end up with a usurious interest rate before you know it.

Many lenders get in trouble with compound interest—that is, interest charged on interest. When you do that, a court will do the math, and calculate the total interest based on a 365 day year, which, when you use compound interest, can skyrocket interest rates to way above the legal limit.

How Much is Usurious?

The magic number when it comes to interest is $500,000. Loan below that amount and the maximum interest rate you can charge is 18% yearly, but above that amount, the maximum interest rate is 25% yearly.

Some people try to get around these limits by using the law of another state, where the maximum usury may be higher. While this is certainly one option, it does create other problems—now you would be asking a Florida court to interpret the laws of another state.

Don’t get in trouble with your loan. Make sure it is legal, and that you can enforce the terms of your agreement. Call our West Palm Beach business attorneys at Pike & Lustig today with any questions you may have.




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