MAXIMUM RATES OF INTEREST THAT MAY BE CHARGED
UNDER NEW YORK LAW FOR PRIVATE LOANS

Thanks in part to the movie and television industries, most people know that “loansharking” - the charging of excessive interest in lending transactions - is illegal, or “usurious.” Indeed, usury laws have long existed in the State of New York, restricting the amount of interest that may be charged for money loans, particularly “private” loans made outside of the banking establishment.

New York law can be frustratingly complicated, however, 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. For example, a provision in New York’s General Obligations Law sets forth the principle that a lender may not charge over a certain rate of interest, but to learn what that rate is, one must refer to a section of the Banking Law, which itself is supposed to be amended periodically to reflect long-term changes in our economy. For criminal penalties, on the other hand, it is the Penal Law that must be consulted, unless

the loan transaction involves $2.5 million or more, in which case one must refer back to the General Obligations Law.

Here are the general rules: if a loan exceeds the maximum civil usury rate, the entire loan is considered void, and the lender may be denied the right to recover not only interest, but principal as well. In addition, the borrower may recover the usurious portion of any interest payment that had previously been made. (In effect, the loan is deemed to have been the functional equivalent of a “gift” from the lender to the borrower.) If a loan exceeds the maximum criminal usury rate, the lender may be prosecuted for committing a felony.

Although a complete overview of usury laws is well beyond the scope of this piece, we have prepared the following chart to show at what levels interest rates may be deemed civilly or criminally usurious under New York law, based on the type and size of the lending transaction:

*If a loan in this category is secured by a one- or two-family home, then it does have a maximum interest rate of 16%.

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The information provided above is intended to help the reader understand the nature of some of the basic issues involved in determining the amount of interest chargeable in New York private lending transactions. Of course, states other than New York may have their own statutory and common-law standards for civil and criminal usury. Regardless of what state’s law will be applied, however, we suggest that, in the event that a legal question arises concerning the extent to which a particular loan transaction is usurious, advice from a knowledgeable attorney be obtained.