The maximum interest rate allowed for different debt transactions varies widely from state to state, and it further varies with the specific transaction. Some states distinguish between loans made by individuals and loans made by institutions; others set different rates for different loan amounts. A few states have no rate limits on debt transactions at all, and others exempt different types of businesses from general limits.
Usury Law Fixed Rates
Most states have usury laws that set the generally allowable maximum annual interest rate, called the usury rate or usury limit, that any organization can charge an individual or organization in that state. The same laws and some related laws set higher and lower interest rates in some circumstances. Usury rates vary considerably from state to state, from 7 percent in Michigan and 8 percent in Alabama to 45 percent in Colorado.
Usury Rate Complications
In a few states, the maximum allowable interest depends on the amount borrowed. In Florida, for instance, the general usury rate is 18 percent per year; for loans above $500,000, however, it is 25 percent. In Georgia the usury limit for loans of $3,000 or less is 16 percent; above $3,000, the limit is 60 percent. While most states set a fixed maximum rate of interest as the usury limit, some states set the maximum as a percentage above some benchmark. Often the law specifies the Federal Reserve interest rate as that benchmark. In California, for example, the usury limit is 10 percent or whatever the Federal Reserve Bank of San Francisco charges to member banks plus 5 percent -- whichever is higher.
Exceptions Lowering the Limit
Many states have a general usury limit for institutions that lend, but a lower limit for individuals. In California, where the general limit is as much as the Federal Reserve rate plus 5 percent, an individual may not charge more than 10 percent. Most states have a lower limit, called "the legal rate," for certain credit transactions in which the contract states that the highest legal interest rate may be charged. These legal limits are substantially lower than the usury limit. In Colorado, for instance, although the usury limit is 45 percent, the legal rate is 8 percent. If you plan to lend a substantial amount of money to another individual or an institution, check with a business attorney first to avoid inadvertently breaking these complex interest rate laws.
Exceptions Raising the Limit
While the particulars vary from state to state, almost all states exempt certain businesses from the usury limit. Car dealers, pawn brokers and businesses that offer installment plans generally have higher limits or are exempted entirely. National banks are exempted in most states, as are credit card providers. Certain Indian tribes offering online loans claim to be exempt from state and federal laws relating to interest rates, citing their status as sovereign nations. This exemption is disputed by the state of New York, among other states.
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