State usury and licensing laws differ significantly from state to state. California’s Constitution permits parties to contract for interest on a loan primarily for personal, family or household purposes at a rate that may not exceed 10% annually, based on the unpaid balance. For example, if payment of a loan of $100,000 is due at the end of one year and the borrower makes no payments during the year, the lender may charge $10,000 (10%) as interest. In the absence of an agreement, the rate of interest upon a loan or of any money or goods or accounts (after demand) is 7% annually.
If the proceeds of a loan are to be used primarily for the purchase or improvement of a home, the loan is not considered a loan for personal, family or household purposes. Regarding these loans and any other loans which are not for personal, family or household purposes, the allowable rate of interest is the greater of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan.
Also, California’s usury laws do not apply to real estate brokers if the loan is secured by real estate, whether or not they are acting as a real estate broker. Also, the 10% rate limitation does not apply to most lending institutions such as banks, credit unions, and finance companies. California limits the rate for some of these loans, but at a higher percentage rate than the general usury law.
Lenders who violate the usury law are prohibited from recovering any interest and may also be subject to the loss of previously paid interest, as well as treble and punitive damages. They may also be subject to a civil penalty of $2,500 per violation. Willful violation of the finance lender licensing laws is punishable by a fine of up to $10,000 and imprisonment for up to one year.
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