All lenders are required to charge interest on loans, but New York State usury law protects certain borrowers from interest rates that are too high. Usury is defined as the lending of money at an exorbitant interest rate. In New York, the maximum rate of interest on a loan is 16% per annum. If a lender charges more than that, it may be liable for civil usury. Interest that is higher than 25% constitutes criminal usury. However, there are various exceptions to these laws depending on the type of borrower and the amount of the loan.
In New York, individual borrowers receive significantly more protection under civil and criminal usury laws than corporations and LLCs. Loans under $250,000 to individuals must comply with both civil and criminal usury rates. In contrast, loans between $250,000 and $2,500,000 are only subject to the criminal usury rate.
Rules for corporate borrowers are more complicated. Generally, corporations and LLCs can be charged more than 16% interest. Under the New York General Obligations Law, loans to businesses under $2,500,000 are generally exempt from the 16% civil usury cap, but are still subject to the 25% criminal usury cap.
Notably, all loans over $2,500,000 are exempt from civil and criminal usury laws regardless of whether the borrower is an individual or corporation.
Where usury has occurred, individual borrowers can bring a lawsuit to recover any moneys paid over the 16% or 25% interest rate. Further, individuals can assert usury as an affirmative defense in an action by the lender for repayment.
As discussed above, corporate borrowers can only use criminal usury as an affirmative defense where available. However, as with individual borrowers, they can recover what they paid over the 25% interest rate.
Note that criminally usurious loans are also void and lenders can lose their principal and interest.
Usury laws establish maximum interest rates. However, lenders can still vary interest rates under the usury limits. Lenders base their interest rates in part on their evaluation of the risks of being repaid. A borrower with a poor credit history or little collateral or income may not get a loan or will be charged a much higher interest rate than a borrower with solid finances. In the case of business loans, one way to get a loan and reduce interest rates is by giving a personal guarantee.
A personal guarantee is an individual’s agreement to repay the loan if the business defaults. Normally, with a business loan, a lender can only sue the business for repayment. If the business has little or no assets, the lender will be left empty-handed. With a personal guarantee, the lender can recover from the personal assets of the individual who made the guarantee.
In some instances, a borrower may be required to provide a personal guarantee in order to obtain a business loan. However, one benefit to this is that the borrower can use the guarantee to negotiate a more favorable interest rate.
Borrowers should be careful with personal guarantees as it puts them at significant financial risk. They could lose their business and personal savings. It is possible to negotiate a limited personal guarantee or there may be other options for financing. Consulting legal and financial advisors for advice is essential.
Borrowers are usually at a disadvantage in lending situations and may find themselves paying too much interest on loans. If you believe you are paying a usurious interest rate or you are lending money to someone and you are unsure how much interest to charge, speak to a qualified attorney. Violations of usury laws can result in significant liability.