Charging interest rates that exceed the state maximum allowed by law is called usury (also commonly referred to as “loansharking”), which is illegal. When it comes to determining at what rate a particular interest charge becomes actionable on a civil basis (where a borrower can object to the terms of the loan), and at what rate the charge may actually expose the lender to criminal liability, New York Law can be a little complicated.
Usury laws in New York, regulate the maximum interest rate a person or entity may be charged on a money loan. The applicable laws are the General Obligations Law and the Banking Law, which set civil law limits, and the NY Penal Law, which sets criminal law limits. Under these laws, if a private loan exceeds the maximum “civil” usury rate, then the entire loan is considered void, and the lender may be denied the right to recover interest as well as principal.
Additionally, the borrower may maintain an action for the return of interest payments previously made. If the loan exceeds the maximum “criminal” usury rate under New York law, then the lender may be prosecuted for committing a felony.
New York laws create a tiered system based upon the nature of the borrower and the size of the private loan:
- For private loans made to individuals that do not exceed $250,000, the maximum annual “civil” interest rate is 16%. The maximum “criminal” interest rate is 25%.
- For private loans made to individuals that are between $250,000 and $2.5 million, there is no maximum “civil” rate. T here is a 25% maximum “criminal” rate.
- For private loans that exceed $2.5 million, there is no maximum “civil” or “criminal” interest rate.
- For private loans made to corporations that do not exceed $2.5 million, there is no maximum “civil” interest rate, but there is a 25% maximum “criminal” interest rate. For loans that exceed $2.5 million, there is no maximum “civil” or “criminal” interest rate.
States other than New York may have their own statutory and common-law rules and standards for usury. Therefore, we suggest that you obtain advice from a knowledgeable attorney in the event that a legal question arises concerning that the interest charges in a particular private loan transaction is usurious. Also, don’t forget to have a carefully draft loan agreement.
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