Usury is traditionally defined as the charging of interest exceeding the permissible legal limit in connection with the lending of money.

What constitutes a unreasonably high rate of interest, what types of transactions fall under the usury law, and the remedies for usury differ greatly in each state.

Usury can be asserted as an affirmative claim in a lawsuit commenced by the borrower against a lender, as well as an affirmative defense against a lender in an action to collect under a promissory note. In certain states, usury is also chargeable as a crime.

In some states, the maximum rate that can be charged in a consumer transaction is generally lower than the maximum rate in commercial transaction under the notion that commercial parties are more sophisticated. Some states exempt certain transactions from the usury law, but do not distinguish between what can be charged in a consumer transaction as compared to a commercial transaction.

Parties to a loan sometimes contract to provide for a choice of law of a state in which the usury laws favor the lender, such as in Colorado. However, state courts have reached different conclusions about whether parties can contract around the state usury law that would ordinarily be applicable to the transaction where the choice of law elected by the parties has no normal relation to the transaction.

Questions also arise as to whether a particular transaction is a loan or an investment and what amounts should be included in the calculation of the effective rate of interest. As to the nature of the transaction, the name of the instrument is a consideration, but not necessarily dispositive of whether the transaction is a loan. Where a transaction is not a loan, the usury laws are inapplicable.

Loan documents often contain savings clauses stating that the applicable interest will be reduced to the maximum permissible rate if it is determined that the rate provided for exceeds the legal limit. State court decisions differ across the country because clauses are sometimes perceived as circumventing usury laws by minimizing their consequences where a lender is caught charging an impermissible rate.

David’s Dicta: In entering into any loan, the cautious lender should ascertain what choice of law is naturally applicable to the transaction or is likely to be upheld based on the relationship of the state to the transaction, whether the transaction is truly a loan or investment, whether other fees and costs being incurred by the borrower should be included in the interest calculation, and whether the savings clause is likely to be enforceable.

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