Wednesday, November 2, 2011

Maximum Interest on Private Loans in New York

Much has been written about how difficult it is now to obtain financing for small businesses. Banks charge high interest rates, and it is tough to qualify even for a bank loan. Angel or VC funding is even harder to come by. So, to secure funding, business owners turn to their friends and family members for loans. Business owners may feel so appreciative of much needed loans, that they may be willing to pay whatever interest they are asked, even if it is 50%.

This blog is to educate the New York residents and business owners as to how much interest they can really charge or be charged on such private loans made by private individuals or corporations (not banking institutions or credit card companies, where separate laws apply).

Charging high interest rates (that exceed the state maximum) is called “loansharking” (as many may be familiar with such term through the movies). In legal jargon, excessively high interest rates are called “usurious”, i.e., illegal. Usury laws regulate within each state the maximum interest rate that may be charged on a money loan. In New York, there are civil law limits found in the General Obligations Law and the Banking Law, and there are criminal law limits, found in the Penal Code.

So, what are the usury limits in New York?

For loans made to individuals, if the loan does not exceed $250,000, the maximum annual civil law interest rate is 16%, and the maximum criminal law interest rate is 25%. For loans between $250,000 and $2.5 million, there is no maximum civil law rate, but there is a 25% maximum criminal law rate. There is no maximum on the interests charged on loans over $2.5 million.

For loans made to corporations, there is no maximum civil law rate of interest, but there is a 25% maximum criminal law interest rate for loans not exceeding $2.5 million.

What happens if the interest rate exceeds the state limit?

If this happens, the entire loan is considered void, and the lender may be denied the right to recover the interest and even the principal. In addition, the borrower may be allowed to recover any “extra” portion of interest that he or she has paid to the lender. If the interest exceeds the maximum criminal usury limit, the lender may face a felony prosecution.

Please note that laws change all the time, and the information in this blog is only accurate as of the time when it was written. Also, this blog does not provide information regarding loans secured by mortgages (where separate rules apply). It is always best to consult a business attorney to check the current usury laws and to prepare the appropriate loan documentation.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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  3. Hi - I have an urgent question regarding usury in New York state. An older family member took out a large loan on three pieces of property he owns. Two are owned by him directly, and one by his corporation. The loan was from a private lender and it was for 1.6 million dollars. The terms were one year at 16 percent. The loan is now in default and he is the final stages of foreclosure. I am assuming that because of the amount and the fact that his corporation is one of the principals on the loan, we could not point to usury at 16 percent. However, I am wondering about 25 percent, and here is how it breaks down: the lender took $350,000 at the closing for prepaid interest (that is more than 16 percent, it is around 21 percent, and I am assuming that this is for points. Nothing is stated in the closing statement or mortgage specifically.) And then, a broker and my relative's attorney (who I believe to be crooked), both took large fees on the deal. The broker received $48,000 and the attorney received $125,000. I do not think the attorney can claim that just in legal fees, and that he too took points. NEITHER the broker nor the attorney are licensed real estate brokers. I do not know enough about New York usury law, and information online is limited, but I have read in California that an unlicensed broker cannot fall under the usury exemption and that those fees can sometimes be considered additional interest. If so in this case, we would reach the 25% needed of 1.5 million. Does anyone know if we could claim those broker and attorney fees as interest points? It is a matter of great urgency, and any advice would be appreciated. My name is Allan and my email is Primpx2@aol.com if anyone could respond. Many thanks.

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