Most people have a general understanding that borrowing money requires the payment of interest. When you inspect the terms of a loan for real estate, you should see the interest stated as a percentage. This is the amount you pay back to the lender in addition to the original loan amount, or principle. Interest rates in excess of legal limits represent a crime known as usury, defined as charging an outrageously high percentage of interest.
State law about usury
As of 2022, the legislature prohibits lending contracts of any type, up to $500,000, that charge more than 18%. Predatory lenders may try to avoid the perception of acting in a usurious manner by obscuring the actual cost of borrowing. In a commercial real estate setting, a lender might do this by using a balloon payment structure or tacking on extra fees. Your paperwork might state an interest rate within the legal limit, but fees or a balloon payment could, in reality, drive up the cost of your loan to a usurious level.
How usury harms borrowers
Usury laws are in place so that people do not agree to loans that will be impossible to pay back. Once excessive interest drive up the cost of the loan, the borrower could fall behind on payments and then lose a property to foreclosure.
Penalties for predatory lenders
A borrower who discovers usury may assert legal rights to correct the problem. When evidence illustrates usury, the law, at a minimum, could force the lender to refund the interest paid in excess of the legal limit. Fines become possible as well. In extreme situations, a lender might lose the legal right to collect the loan.