california usury laws
What is “usury”, and how are you protected from it?
In making of loans to conventional real estate buyers and “flippers”, investors should remember that for most private transactions, California enforces its usury law against excessive interest charges, with certain exemptions for seller carry back loans, and loans “made or arranged” by a licensed broker.
Usury is defined as charging a rate of interest in excess of the legal limit, and for personal, family or household purposes it is 10% per year, and for loans for “any other purpose”, the legal rate is either 10% per year, or 5% per year plus the federal discount rate that exists on the 25th day of the month preceding the date of the loan contract or date the loan was made, whichever is greater. The rate is set by California’s constitution, but there are exceptions for federal banks, credit card companies, and other institutional lenders, including the VA and FHA.
Investment loans used to purchase, build or improve real estate, also known as “hard money loans”, are considered loans for “any other purpose” and are subject to the higher of the 10% rate or the rate based upon the federal discount rate. Continue reading