When entering into any lending agreement, whether it be a private loan, a credit agreement, or a mortgage, the interest rate for the lending instrument is subject to the given state’s usury laws. Usury laws are state-specific laws that set forth limits for interest rates in specific types of lending instruments to prevent lenders from imposing unreasonable or predatory interest rates. Violations of usury laws, depending on the state, can result in criminal penalties and can also render the underlying loan void in the civil context. Unlike other broadly applicable laws that have been standardized across states, such as the Uniform Commercial Code, each state has its own standards for what is considered a usurious rate, and in some instances, its own set of specific procedures to avoid the penalties for imposing a usurious rate.
A careful review of the relevant state’s usury laws is required at the outset when drafting a lending instrument. Some states do not have any limitations on interest rates as long as they were set by written agreement, except for very specific statutory limitations for certain transactions. See e.g. S.D. Codified Laws § 54-3-1.1 (In South Dakota, there is no maximum interest rate or usury rate restrictions if the parties agreed to the rate by written agreement); N.M. Stat. Ann. § 56-8-3 (1978) (In New Mexico there is a maximum interest rate of 15 percent, only when a rate has not specifically been agreed to in the written agreement). A number of states have different limits on interest rates depending whether the borrower is an individual or whether it is a business or corporation. See, e.g. Wash. Rev. Code 19.52.080 (In Washington interest rate limitations only apply to consumer transactions); Mo. Rev. Stat. § 408.035 (no interest rate limitations on loans to corporations, partnerships or LLCs in Missouri). Other states only impose usury restrictions on smaller sums of money, with the purpose of limiting predatory behaviors such as specific pay-day lending practices. See, e.g. Miss. Code Ann. § 75-17-1(5) (2021) (loans of over $2,000 are exempt from usury requirements in Mississippi); Ga. Code Ann. § 7-4-2 (2021) (In Georgia, for loans of $3,000 or less, the interest rate cannot exceed 16 percent annually).